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FORM 10-KSB/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1996.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 1-8334
REGAL INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Delaware 75-1071589
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization Identification No.)
52/F Bank of China Tower
1 Garden Road
Hong Kong
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (852) 2514-0300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Common Stock, $.01 par value
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the Registrant was required to file such report)
and (2) has been subject to such filing requirements for the past 90 days.
yes [x] no [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [x]
Revenues for the year ended December 31, 1996 were $4,640,000 The
aggregate market value of the common stock of the Registrant held by
non-affiliates of the Registrant on March 31, 1997 was $413,000. The aggregate
market value was computed by reference to the average bid and asked prices for
the Common Stock on March 31, 1997. Solely for the purposes of this response,
executive officers and directors are considered the affiliates of the Company at
that date.
As of March 31, 1997, 81,806,198 common shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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None
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PART I.
ITEM 1 - DESCRIPTION OF BUSINESS
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BUSINESS DEVELOPMENT
A. General
-------
In September, 1996, Regal International, Inc. (the "Registrant" or the
"Company"), which term shall include, when the context so requires, its
subsidiaries, completed a series of transactions which resulted in the
Registrant's acquisition of a new business and disposition of its existing
business assets and liabilities. The information set herein discloses
information required by Form 10-KSB with respect to business of the Registrant
(i) prior to the acquisition of the new business and (ii) after the sale of the
existing business and acquisition of the new assets.
B. Formation and Development of Registrant
---------------------------------------
On May 10, 1982 the Registrant became a separately publicly held corporation as
a result of a spin-off from Texas International Company. Shareholders of Texas
International Company were issued one share of the Registrant's common stock for
each two shares of Texas International's Common Stock.
The Company changed its state of incorporation to Delaware in March 1982 through
a merger with a wholly-owned subsidiary organized for that purpose. The
surviving Company's authorized capital stock consisted of 20,000,000 shares of
common, par value $.10 per share ("Common Stock") and 10,000,000 shares per
preferred stock, par value $.10 per share, ("Preferred Stock"). At the November
17, 1987 Annual Meeting, shareholders voted to increase the authorized number of
shares of Common Stock to 75,000,000. At the May 25, 1993 Annual Meeting, the
shareholders voted to change the par value of Common Stock from $.10 per share
to $.01 per share and to increase the authorized number of shares of Common
Stock to 150,000,000.
In 1987 the Company acquired all of the issued and outstanding common stock of
Bell Petroleum Services, Inc. ("Bell"), an oilfield products and services
company.
On December 7, 1994 the New York Stock Exchange ("NYSE") suspended trading of
the Company's Common Stock pending delisting as the Company did not meet the
NYSE's criteria for continued listing. The Company decided not to contest the
delisting and the Common Stock was removed from listing and registration on the
NYSE effective February 9, 1995. The Company's Common Stock began trading on the
NASD Electronic Bulletin Board in August, 1995.
C. Background of Recent Transactions
---------------------------------
On February 19, 1996, the Registrant acquired all the issued and
outstanding shares of Capital Stock of Acewin Profits Limited, a British Virgin
Islands corporation ("Acewin"), from China Strategic Holdings Limited, a Hong
Kong company ("CSH") listed on The Hong Kong Stock Exchange Limited. Acewin's
sole asset is all the issued and outstanding shares of China Machine (Holdings)
Limited, a Hong Kong company ("CMHL"). CMHL's sole asset is a 55% joint venture
equity interest in Wuxi CSI Vibration Isolator Co., Ltd. ("Wuxi CSI"), a
Sino-foreign joint venture established in September 1993.
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The consideration paid by the Registrant for the Acewin Stock was $13.5
million. Said purchase price was paid by the Registrant's delivery of its
Convertible Note bearing interest at the rate of nine percent (9%) per annum
after an initial six (6) month interest-free period (the "Convertible Note").
Interest on the Convertible Note was payable on an annual basis, with all
principal being due and payable on January 31, 1999. The principal and any
unpaid interest owing on the Convertible Note were convertible into shares of
the Common Stock, $0.01 par value, of the Registrant ("Common Stock") at a
conversion price of $0.0302 per share. The Convertible Note was secured by a
Pledge Agreement granting CSH a security interest in the Acewin Stock. The
Convertible Note was fully repaid upon the sale of Acewin Stock, as described
below.
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Immediately following the acquisition of the Acewin Stock and as a
condition thereto, the Registrant sold and transferred the existing operating
assets and real property of the Registrant to a newly formed corporation, Regal
(New) International, Inc. ("New Regal") in exchange for New Regal's assumption
of all liabilities of the Registrant, other than the Convertible Note, and $2.5
million, all in accordance with the terms and conditions of a certain Asset
Purchase Agreement, dated as of February 8, 1996, by and between Registrant and
New Regal.
The $2.5 million purchase price was paid as follows: $800,000 in cash and
the balance by delivery of two (2) Promissory Notes, one in the principal amount
of $900,000 (the "$900,000 Note") and the second in the principal amount of
$800,000 (the "$800,000 Note"). The $900,000 Note bears interest at 9% per annum
and is payable in sixty (60) equal monthly installments of principal and
interest. The $800,000 Note bears no interest and is due and payable in one
installment on January 31, 2001. New Regal's obligations under the $900,000 Note
and the $800,000 Note are secured by a pledge of all of the issued and
outstanding shares of capital stock of New Regal. All the issued and outstanding
shares of New Regal were owned by Harlequin Investment Holdings Limited
("Harlequin"). Harlequin was at the time of this transaction the beneficial
owner of approximately fifty-five percent (55%) of then currently outstanding
shares of the Registrant's Common Stock. Subsequent to this transaction,
Harlequin reduced its beneficial ownership of the Registrant to less than one
percent. See Item 11 - Security Ownership of Certain Beneficial Owners and Item
13 - Certain Relationships and Related Transactions.
In connection with the above-described transactions, Janak Desai, Nils
Ollquist and Garish Sharma resigned as directors of the Registrant, and Oei Hong
Leong, the Chairman of CSH, Chung Cho Yee Mico, and Ma Wai Man Catherine were
elected to fill the vacancies created by such resignations.
On March 8, 1996, Horler Holdings Limited ("Horler") purchased 40,500,000 shares
of common stock representing 49.51% of the then issued and outstanding share
capital of Regal from a major shareholder of the Company for $1,223,000, thus
becoming its major shareholder.
On September 10, 1996, the Registrant acquired all the issued and
outstanding shares of Westronix Limited, a British Virgin Islands corporation
("Westronix"), from China Strategic Holdings Limited, a Hong Kong company
("CSH") pursuant to the terms of the Acquisition Agreement entered into on
September 10, 1996. Westronix's sole asset is a 100% equity interest in China
Construction Holdings Limited, a Hong Kong company ("China Construction") which
owns 51% joint venture interest in Hangzhou Zhongche Huantong Development Co.,
Ltd. ("HZHD"), a Sino-foreign joint venture established in Hangzhou, Zhejiang
Province, the People's Republic of China ("China") on June 23, 1993. The
consideration paid by the Registrant is a $30 million Convertible Note bearing
interest at the rate of nine percent (9%) per annum after an initial six (6)
month interest-free period (the "Note").
The Note is payable interest only on an annual basis, with all principal
being due and payable on September 10, 1999. The principal and any unpaid
interest due on the Note are convertible into shares of Common Stock, $0.01 par
value, of the Registrant ("Common Stock") at a conversion price of $0.0302 per
share. The consideration for the acquisition of Westronix was deemed fair
pursuant to the fairness report issued by the independent third party engaged by
the Registrant.
CSH from whom the Registrant acquired HZHD, is an affiliate of the
Registrant and the major shareholder of the Registrant's common stock. Three
directors of the Registrant are also the directors of CSH.
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On September 11, 1996, the Registrant disposed of all the issued and
outstanding shares of Acewin Profits Limited, a British Virgin Islands
corporation ("Acewin"), to BTR China Holdings B.V., a Netherlands company (the
"Purchaser") pursuant to the terms of the Agreement relating to the sale and
purchase of the entire issued share capital of Acewin (the "Agreement") entered
into on September 11, 1996. Acewin's sole asset was a 100% equity interest in,
China Machine Holdings Limited ("China Machine"), a Hong Kong company, which
owned 55% joint venture interest in Wuxi CSI Vibration Isolator Co., Ltd.
("Wuxi"), a Sino-foreign joint venture established in September, 1993.
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The consideration paid by the Purchaser consisted of $13,950,000 (the
"Purchase Price"). The major portion of the proceeds were then used to repay the
$13,500,000 Convertible Note payable to Horler Holdings Limited ("Horler"), a
wholly-owned subsidiary of CSH, and issued by the Registrant in connection with
the acquisition of Wuxi in February of 1996.
The Board of Directors of the Registrant determined that disposition of
Wuxi was in the best interest of the Registrant and was advantageous to the
Registrant's plans to concentrate the resources of the Registrant in
infrastructure projects in China in connection with the Registrant's recent
acquisition.
As of December 31, 1996, the Company had the following subsidiaries:
Westronix Limited ("WL") - a holding company incorporated in the British Virgin
Islands.
China Construction Holdings Limited ("CCHL") - a company incorporated in Hong
Kong and formally known as China Construction International Group Limited.
Hangzhou Zhongche Huantong Development Co., Ltd. ("HZHD"), a Sino-foreign
equity joint venture located in Hangzhou, Zhejiang Province, China.
The Company holds a 100% interest in WL. WL holds a 100% interest in CCHL which
in turn holds a 51% interest in HZHD.
REGAL INTERNATIONAL, INC.
ORGANIZATION CHART
-----------------------------
| Regal International Inc. |
| (Delaware) |
-----------------------------
| 100%
|
-----------------------------
| Westronix Limited |
| (BVI) |
-----------------------------
| 100%
|
-----------------------------
| China Construction |
| Holdings Limited |
| (Hong Kong) |
-----------------------------
|
| 51%
-----------------------------
| Hangzhou Zhongche |
| Huantong Development Co.|
| Ltd. (PRC) |
-----------------------------
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DESCRIPTION OF THE BUSINESS OF REGISTRANT PRIOR TO FEBRUARY 19, 1996
GENERAL
The following discussion is intended to describe the business of the
Registrant during the twelve (12) month period ending December 31, 1995 and the
period from December 31, 1995 to February 19, 1996.
RECENT FINANCIAL PERFORMANCE AND SIGNIFICANT EVENTS
During the Second Quarter of 1995, the Registrant sold equipment pertaining
to a certain product line. The sale resulted in a gain of $300,000.
On December 18, 1995 a conditional Joint Venture Agreement between Mardec
Berhad, a company incorporated in Malaysia, and the Registrant was consummated.
Subject to various conditions and approvals, specific machinery and equipment
and technical knowledge of the Registrant, will be transferred to Malaysia. The
Joint Venture is to manufacture products for the international oil and gas
industry. The Registrant's 49% equity interest was contributed in the form of an
agreed upon value for the transfer of machinery and equipment and technology.
This joint venture interest was transferred to New Regal as part of the February
19, 1996 sale of assets.
The 1995 net income of $28,000 is an increase of $560,000 from 1994 net loss
of $532,000. This favorable outcome was primarily the result of a $500,000
decrease in revenue and a gain on the sale of assets of $345,000. Revenues in
1995 were $7,591,000 as compared to $7,091,000 in 1994.
In 1992 the Registrant entered into a financing agreement which provided for
advances on selected accounts receivable. The balance outstanding at December
31, 1995 was $175,000 as compared to $283,000 at December 31, 1994. In December,
1995 the Registrant entered into a new financing arrangement, funded in January,
1996, to replace the existing facility. The new Agreement provides for financing
on both accounts receivable and inventory. This financing arrangement was
assumed by New Regal.
PRODUCTS AND MARKETS
The Registrant's primary business was the manufacturing and sale of oilfield
and marine rubber products. The Registrant also provided safety services for
oilfield drilling, production and workover activities.
The oilfield rubber products primarily consisted of drill pipe protectors,
swab cups, and replacement elements for blow-out preventers ("BOP") for use in
onshore and offshore drilling and production activities. The marine rubber
products group mainly includes shock absorbers and contact surfaces for use in
bumper systems on offshore oil and gas platforms.
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Total operating revenues were as follows:
Operating Revenues As a % of Continuing
In Thousands Operating Revenues
1995 1994 1995 1994
---- ---- ---- ----
OILFIELD, MARINE AND
CUSTOM MOLDED PRODUCTS
Oilfield Products $5,793 $5,129 76.3% 72.3%
Marne Products 967 937 12.7 13.3
Custom Molded Products 341 307 4.5 4.3
Total 7,101 6,373 93.5 89.0
====== ====== ====== ======
ENERGY SERVICES
Safety Services 490 718 6.5 10.1
Total Operating Revenues $7,591 $7,091 100.0% 100.0%
====== ====== ====== ======
[/R]
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OILFIELD RUBBER PRODUCTS:
The Registrant produced and sold several lines of products for the oil and
gas industry that historically have been its major source of revenue. This
product group served two primary markets: (1) exploration and development
drilling and (2) well completion, production and servicing. Both markets include
onshore and offshore activities.
The following is a summary description of the Registrant's major oilfield
rubber products:
DRILL PIPE PROTECTORS - Expendable collars attached to the drill pipe string
during drilling to protect the drill pipe and casing string against severe wear
as the drill pipe rotates within the casing. Drill pipe protectors are
particularly desirable for wells requiring more than twenty days of drilling
through casing, directionally drilled wells (such as those drilled from offshore
platforms) and wells with directional problems.
BLOWOUT PREVENTER REPLACEMENT ELEMENTS - A BOP is a heavy metal valve system
that permits a well to be shut-off in an emergency during drilling or servicing
of the well. The rubber elements of a BOP play a critical part in its
performance. As a result of frequent testing and closing during normal drilling
or well servicing operations, BOP rubber parts are subject to deterioration and
require frequent replacement.
SWAB CUPS - Swab cups are used to remove fluids from wells, to test
production rates or to cause a well to flow naturally. Generally, swabbing is
accomplished by attaching the swab cup to a metal connector which is then
lowered on a cable into the well by a servicing rig. As the cable is withdrawn,
the swab cup lifts the fluids and other substances to the surface. Swabbing a
new well removes completion fluids left in the hole while old wells treated with
remedial fluids are swabbed to clean out the wells. The life of a swab cup is
relatively unpredictable depending largely upon downhole conditions in the well.
Ordinarily, swab cups must be replaced after a few swabbing runs.
The Registrant produced a broad line of swab cups to fit various tubing and
casing sizes and for a variety of downhole conditions including sandy fluids and
high water content.
OTHER OILFIELD PRODUCTS - The Registrant also manufactured and sold: (1) rod
and tubing stripper rubbers used to control well pressures while circulating
during well servicing; (2) oil saver rubbers, which are replacement items used
on wireline strippers to clean fluids from the wirelines being removed from the
well during servicing; (3) pipe wipers, which are circular elements used to
remove drilling mud, oil and other fluids from tubing and drill pipe as they are
removed from the well; (4) rod and tubing guides, which enhance pump efficiency
and reduce sucker rod and tubing wear in producing wells; (5) control line
protectors, to protect cables that go "downhole" into the well; and (6)
pulsation dampener bladders, that are used in equipment designed to minimize the
effects of pressure changes.
MARINE RUBBER PRODUCTS:
The Registrant manufactured and sold barge bumpers and shock-mounted boat
landings used to protect offshore platforms from the combined effects of wave
forces and service vessel impacts. These products, more particularly described
below, are available as complete systems, as individual shock absorbing
components for new platforms or as retrofit systems for existing platforms.
REGAL DEFENDER SYSTEM - The Regal DEFENDER is a patented bumper system
consisting primarily of two shock cells with eccentric bumper rings attached to
a steel contact surface. When installed on an offshore drilling or production
platform, this system provides omnidirectional shock absorption that protects
the platform and service vessels. The Registrant's DEFENDER System provides
substantially greater protection than rubber bumpers or similar devices
frequently used on offshore platforms. Available as a standard product in a
number of different design configurations, the DEFENDER System can be
individually adjusted to suit each specific platform application. Individual
DEFENDER System components are also sold for use on offshore platforms. DEFENDER
is a registered trademark of the Registrant.
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ENERGY SERVICES:
Bell Energy Services provides H2S Safety Services. H2S Safety Services are
primarily utilized during drilling and workover operations of oil and gas wells
in known "sour gas" locations or zones. Equipment is made available for the
detection of and protection from the adverse consequences of these harmful
gases.
MANUFACTURING AND QUALITY CONTROL
A central element of the Registrant's competitive strategy in oilfield and
marine rubber products was a highly integrated manufacturing operation which
enables the Registrant to maintain quality standards over each step of its
production process. The process begins with the blending of unvulcanized natural
or synthetic rubbers, reinforcing agents and curing agents. The Registrant
blends the rubber compounds used in each product and over the years has
developed substantial experience in creating compounds with specific performance
characteristics. After blending, the rubber is extruded and sized for the
specific product. The extruded rubber and any necessary metal parts are then
placed in a mold and a press, subjecting the rubber to heat and pressure that
vulcanizes and bonds it to the metal. Metal components used in marine products
are generally fabricated by the Registrant.
The Registrant exercised quality control over each step of the production
process. A sample of each batch of rubber compounds was tested to assure
acceptability. Each product was put under numerous quality control checks during
extrusion and molding. Finished products were subjected to further testing. Some
products were sampled and underwent simple functional tests, while others were
individually tested for performance. The Registrant achieved International
Standards Organization (ISO) 9001 certification through Lloyd's Register Quality
Assurance, Ltd. on March 1, 1995. The Quality Management System was applicable
to the design, development, manufacture and distribution of rubber products and
ancillary metal products for oilfield, offshore, marine and customized
applications.
RAW MATERIALS
Significant raw materials used by the Registrant were natural and synthetic
rubber and metal stock. Natural rubber used by the Registrant, produced
primarily in Malaysia, was purchased through import brokers and was readily
available. Synthetic rubber, metal inserts, and metal stock were available from
a number of suppliers in the United States.
PATENTS
Many of the Registrant's oilfield and marine rubber products were proprietary
products, several of which are covered by patents. In the opinion of management,
no single patent was essential to the Registrant's operations and the loss or
invalidity of a single patent would not have a material adverse effect on the
business or financial condition of the Registrant.
SALES AND DISTRIBUTION
The Registrant marketed its products and services, both domestically and
internationally, through a network of sales representatives and agents. In
addition to its sales headquarters located in Corsicana, Texas, the Registrant
maintained a sales office in Houston, Texas and was represented worldwide in all
major oil and gas producing areas. Export sales totaled $2.1 million in 1995,
and $1.5 million in 1994.
EMPLOYEES
At February 19, 1996, the Registrant employed 87 persons. The Registrant was
a party to a three-year contract executed on May 21, 1993 with the Registrant's
50 plant workers who are represented by the United Rubber,
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Cork, Linoleum and Plastic Workers of America. The Registrant had not
experienced a strike in the last 15 years and believes that management has good
relations with all of the Registrant's employees and the Union. Most of the
employees have joined New Regal.
BACKLOG
Backlog at December 31, 1995 totaled $131,000, consisting of $1,000 for
oilfield rubber products, $128,000 for marine products, and $2,000 for contract
molding products. At December 31, 1994 backlog totaled $155,000 consisting of
$18,000 for oilfield rubber products, $129,000 for marine rubber products, and
$8,000 for contract molding products. All backlog orders were expected to be
completed before December 1996 and all orders were transferred to New Regal.
OPERATING RISKS AND INSURANCE
The Registrant's products and oilfield services were used in drilling,
workover, and production operations. These operations are subject to inherent
risks such as blow-outs and other oilfield hazards, any of which can cause
personal injury and loss of life, damage or destroy equipment, suspend
production operations, or cause damage to property of others.
The Registrant maintained public liability, product liability, property
damage, workers' compensation insurance, and occupational accident and liability
policies.
BUSINESS OF REGISTRANT PRIOR TO SEPTEMBER 10, 1996
- --------------------------------------------------
After February 19, 1996 the Registrant owned, as its sole asset, all the issued
and outstanding capital stock of Acewin, a company which owned all the
outstanding capital stock of CMHL. CMHL was the holder of a 55% interest in Wuxi
CSI. Wuxi CSI was the only operating subsidiary of the Registrant prior to
September 10, 1996. Wuxi CSI, established in September 21, 1993, was a
Sino-foreign joint venture in China between CMHL and Wuxi Vibration Isolator
Factory. Wuxi Vibration Isolator Factory, built in 1960, was a National Grade II
Enterprise (the National Grade System grades all factories in terms of size,
profitability, sales, productivity and excellence in products. There are only a
few Grade I Enterprises in each province) and Wuxi CSI was the largest vibration
isolator producer in China. Wuxi CSI, was a primary supplier to domestically
produced Volkswagens, Peugeots and Audis developed close ties to China's
burgeoning automobile industry.
Wuxi CSI, with registered capital of $8.0 million, occupied 39,540 square
meters of land, including a building area of 45,504 square meters and workshop
area of 37,232 square meters.
The factory was situated in Wuxi City which is located in Southern Jiangsu
Province, at the center of the "golden delta" of the Yangtze River, bordering
Suzhou in the East and the Hangzhou in the West. It is 128 km. apart from
Shanghai; 183 km. from Nangjing and 40 km. away from the natural port of
Zhangjiagang. The urban area around Wuxi City covers 397 square km. with a
population of 0.928 million. Wuxi City has become a major international
open-port city at the mouth of the Yangtze River.
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Business Of Wuxi CSI Vibration Isolator
- ---------------------------------------
Wuxi CSI was engaged in the manufacture and sale of vibration isolators,
rubber damping materials, stainless steel bellows expansion joint and similar
products, primarily for sale within China. Its primary customer base was in
Shanghai, although the distribution of its sales was regional. Being located
only 128 km. from Shanghai where three (3) of the largest automobile
manufacturers in China produce over 50% of the entire automobile market of
China, Wuxi CSI sold over 70% of its output to Shanghai Volkswagon.
Wuxi CSI Sales For The Years Ended December 31, 1995 And 1994
- -------------------------------------------------------------
Table 1 Sales Analysis
(Rmb in thousands)
1994 1995 % Change
------ -------- ---------
Sales 72,570 108,408 49%
Gross Profit 26,357 43,623 66%
Operating income (1) 12,184 27,981 130%
Net income 7,531 16,871 124%
- ------------------------
(1) Operating income means income before minority interest, income tax, net
interest expense and other income.
Products And Markets
- --------------------
Wuxi CSI produced a complete range of the following products under the brand
name "Xizhen" (See Table 2 - Sales by Units).
(1) Rubber-Metal Vibration Isolators
---------------------------------
Minimizes harmful vibrations and noise. Widely utilized in automobiles, ships,
trains and heavy machinery.
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(2) Metal Bellows
-------------
Widely used in the shipbuilding, petroleum, chemical, industry, railway,
construction, electric power and nuclear industries.
(3) Bitumen Damping Materials
-------------------------
Reduces vibration and noise from mechanical equipment installed in automobiles,
refrigerators, fans and machinery.
Table 2 Sales by Units
Type of Vibration Isolator 1994 1995 % Change Market
- -------------------------- ---- ---- -------- ------
- -General Vehicle Vibration
Isolator 388,007 353,774 -8.8% Auto
- -Santana (Volkswagen) 1,795,260 3,133,754 74.6% Auto
- -Audi 97,833 161,992 65.6% Auto
- -Damping Materials and Damp-
ing Materials with fabrics 1,511,007 4,691,384 210% Auto
Others 285,032 253,631 -11.0% Auto
Approximately 74% of Wuxi CSI's total sales in 1995 were made to Shanghai
Volkswagen. Shanghai Volkswagen manufactures the "Santana". Compared to the
Shanghai region, sales to other regions were relatively small. Sales to Jilin
and Jiangsu come in second and third place but only accounted for 5.4% and 3.5%
of total sales, respectively. (See Table 3 Geographical Sales Distribution).
Table 3 Geographical Sales Distribution - 1995
Region % of total sales
- ------------------------------------
Shanghai 74.1
Jilin 5.4
Jiangsu 3.5
Guangdong 0.2
Sichuan 0.1
Jiangxi 0.8
Shandong 1.3
Others(1) 14.6
- ---------------------------
Total 100%
(1) Others refer to regions which are not listed above in the table
The complete information of the Company's business prior to September 10, 1996
has been provided in the Company's report on Form 10-KSB for the fiscal year
ending December 31, 1995, which has been filed with the SEC.
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BUSINESS OF REGISTRANT AFTER SEPTEMBER 10, 1996
On September 10, 1996 the Registrant acquired, as its sole asset, all the
issued and outstanding capital stock of Westronix Limited, a company which owns
all the outstanding capital stock of China Construction Holdings Limited
("CCHL"). CCHL is a holder of a 51% interest in Hangzhou Zhongche Huantong
Development Co., Ltd. ("HZHD"). HZHD is the only operating subsidiary of the
Registrant. HZHD established on June 23, 1993, is a Sino- foreign joint venture
in China between CCHL and its Chinese partner, Hangzhou City Transportation
Development Company.
HZHD has been established to develop the construction project called "Hangzhou
Ring Road". The Hangzhou Ring Road is designed to direct the congested traffic
outside the city of Hangzhou. The city of Hangzhou, which covers an area of
approximately 16,000 square kilometers and has a population of approximately 5.6
million, is the capital of Zhejiang Province in China. The city is located about
150 kilometers from Shanghai and has experienced rapid growth in its light
manufacturing industry in recent years, most notably in electronic instruments,
refined chemicals, machinery and electrical appliances.
Infrastructure projects, like Hangzhou Ring Road, became a priority to the
government of China in recent years. According to directives of the 10-year
program (1991 - 2000) of the government of China, one of its key national goals
is to build more basic industry and infrastructure projects during the 1990s.
Preference is given to the construction of the principal national trunk
highways. In addition, highway construction in coastal regions is prioritized.
The Hangzhou Ring Road was approved as a priority project by the Hangzhou
Municipal Planning Committee in 1992. HZHD has registered capital of RMB200
million and total investment of RMB600 million. China party contributed RMB98
million by injecting the existing Class 2 toll road, and CCHL contributed RMB102
million in cash. The principal asset of HZHD is its 100% interest in a 30-year
joint venture consisting of the Hangzhou Ring Road, a three-section toll road
surrounding the city of Hangzhou, which was completed in December, 1997. Two of
the three sections of the road were already completed by the end of 1996.
When the toll road is fully completed, it will be 38.2 km long and comprised of:
- -13.2 km of existing Class 2 wide single carriageway linking Jichang (Airport)
Road to Xiangfuqiao. The traffic capacity is estimated at about 20,000 vehicles
per day (two way flow).
- -25.0 km of Class 1 construction (6km of four-lane wide single carriageway with
slow lanes and 19km of dual two-lanes with hard shoulders for emergency)
including 21 bridges and three grade-separated junctions. The implementation of
this section of the toll road consists of two phases: Northwest section
(Xiangfuqiao to Liuxai, 13.7 km) which was completed in December, 1996 and West
section (Liuxai to Lingjiaqiao, 11.3 km), was completed in December, 1997. This
section encompasses extensive bridge works including:
* river crossing bridges
* bridges for road interchanges
* underpasses and underground crossings for pedestrians and vehicles
The section of the road from Jichang Road to Xiangfuqiao is now in operation and
has been generating revenues from toll collection from the toll plazas at
Xiangfuqiao. The section from Xiangfuqiao to Liuxai was completed in 1996 and
obtained approval from the government to collect tolls. The section from Liuxai
to Lingjiaqiao was completed in December, 1997. Upon full completion and after
receiving the approval from the PRC authorities, toll plazas are expected to
operate at Xiangfuqiao (already in operation), Liuxai and Lingjiaqiao.
12
<PAGE>
The Company is currently in a process of installing in electronic surveillance
systems along with utilizing computerized toll collection systems in toll
plazas.
The government of Zhejiang Province has approved a toll increase of 100% for the
Hangzhou Ring Road, effective from March 1, 1997.
Overview of Transportation Infrastructure in China
- -------------------------------------------------
History
The earliest highway appeared in China at the beginning of this century. Up to
the founding of China in 1949, the country had merely 75,000 kilometers of
highways, most of them cobblestone roads. During the second half of the century,
however, highway construction in China experienced rapid development. By the end
of 1995, total highway mileage had reached 1.14 million kilometers. So far,
highways have extended to all counties throughout the country, and 98 percent of
China's townships and 80 percent of villages have bus service.
China's highway construction after 1949 can be divided into three periods.
The first period was between 1959 and 1957, when emphasis was put on filling in
the main arteries of the country. The second period, 1958-1980, experienced a
rapid popularization of highways throughout the country. During this period
highway mileage increased from 254,600 kilometers to 888,000 kilometers, and 90
percent of all counties and townships were made accessible by roads.
In the third period, which started in 1981, China is seeking the popularization
of highways with improvements in road quality. Priority is now given to the
latter. With high grade highways and expressways being built in the remotest
areas, highway construction in China entered a period of rapid development.
Recent Developments
Since the implementation of "reform and opening", along with the transition from
a planned economy to a "socialist market economy", traffic between different
cities and between urban and rural areas in China has increased. This has
resulted in a sharp increase in demand for medium- and short- distance
small-scale freight transport, a large increase in passenger flow and a steep
rise in highway traffic. Many highways have actual volumes of four to five times
more than their designed capacity. Traffic has become an outstanding bottleneck
hindering economic development.
To meet the need of rapid economic development, China's communication bureaus
have shifted emphasis onto the economically developed regions where there are
urgent traffic problems, constructing and renovating roads radiating from
economic centers and coastal areas to neighboring and hinterland areas. At the
same time, in line with the increase in traffic, highways connecting energy
bases, harbors and large and medium-sized cities, tributary roads to railways,
arteries connecting economic zones and important townships, and tourist highways
and roads for poor areas, are to be built or renovated. In addition, a certain
number of expressways will be constructed according to necessity and
possibility.
The construction of the Shenyang-Dalian Expressway in 1987, the first of its
kind in China, has ushered in a new era. So far, more than 20 expressways,
totaling 2,100 kilometers, have been built through China. Completed and opened
on September 1, 1990, it has greatly shortened the time and distance between the
two largest cities in north-eastern China, producing considerable economic
benefit. The Shenyang-Dalian Expressway, the first of its kind in China, has
greatly promoted and accelerated highway and expressway construction throughout
the country, especially in the economically developed areas. So far China has a
total of 33 major highways, including those still under construction.
13
<PAGE>
Highways in China are no longer the cart roads of the old. They have become
fully facilitated, with smooth surfaces and clear and neat traffic markings.
Sichuan Province, which had very poor transportation, now has a complete
communications network. The expressway connecting Chengdu and Chongqing has
reduced the time between the two cities to a little over three hours.
Compared with the sharp increase in transportation volume, however, highway
construction still lags. To solve this problem, the Chinese government has
mapped out a long-term plan for enhancing the country's communication network.
The plan covers the construction of highways, waterway transportation and
relevant safety systems. According to the key projects for highway construction
in the plan, starting in 1990, a highway network of 12 national arteries
totaling 35,000 kilometers has started to be constructed between Beijing and the
provincial capitals, major cities, important communication hubs and key ports
throughout the country to form a nationwide passageway for rapid transportation.
The 12 arteries that make up the national highway network will include five
north-south highways from Tongjiang to Sanya, Beijing to Fuzhou, Erenhot to
Hekou and Chongqing to Zhanjiang, and seven east-west arteries from Suifenhe to
Manzhouli, Dandong to Lhasa, Qingdao to Yinchuan, Lianyungang to Korgas,
Shanghai to Chengdu, Shanghai to Ruili and Hengyang to Kunming. These highway
arteries will link up more than 200 cities, covering a population of 600
million. They will be able to shoulder more than 20 percent of the country's
total traffic.
These highway arteries will be composed mainly of expressways and grade-1 and
grade-2 special roads, well-equipped with complete safety, telecommunications
and administration systems. Many new technologies, with micro-electronic
technologies at the core, will be applied to these highways. With the help of
these instruments, all the necessary information on the way, including the
traffic situation, accidents, road surface conditions and weather, will be fed
back in time to a computer system in the traffic control center. The
information, after being processed, will then be transmitted back and displayed
on the information panels erected along the roads.
14
<PAGE>
Raw Materials
- -------------
The raw materials utilized by the Company in construction of the Hangzhou Ring
Road consist mainly of cement, gravel and steel rebar. The third and final
section of the Hangzhou Ring Road, currently under construction, is being built
by a general construction firm hired by the Company. The general contractor is
responsible for procuring all raw materials necessary for completion of the
project, and has not experienced shortages of any raw materials.
In general, the cement industry in China is competitive and supply shortages are
rare. Since there is a lack of obvious product differentiation, manufacturers
compete based primarily on price and timely delivery. Currently, there are
approximately 7,700 cement plants in China, of which 67 are state-owned
enterprises and are capable of producing high grade cement. The average annual
output of these plants is approximately 660,000 tons. The production cost of
cement in China varies with regions, ranging from RMB150 to RMB250 per ton. Fuel
and electricity account for 40% of the total production cost, while labor
accounts for only about 5% of the total production cost. Since 1993, the
government has relaxed state control of cement prices and allowed cement prices
to fluctuate according to market condition determined by demand and supply. The
uneven distribution of resources and differences in the pace of economic
development in different regions of China, creates the movement of cement
prices. In the southeast coastal provinces and the Yangtze river valley, the
average price is comparatively higher than the national level.
Since 1978 the Chinese steel industry has grown rapidly. At the end of 1992
there were 1,744 iron and steel enterprises in China (including mining
companies) and 3.8 million iron and steel workers as compared with 1,322
companies and 2.4 million workers in 1980. From 1980 through 1992, steel
production increased at a compound annual growth rate of 6.7% with growth of
13.9% in 1992 and 16.2% in 1993. In 1994, with total steel production of 91.5
million tons, China became the world's second largest steel producer behind
Japan.
The rate of growth in steel production in China also increased. This accelerated
growth is primarily due to the fact that, under China's new economic policies,
demand for steel as a raw material for various industries and to build and
rebuild China's infrastructure has increased substantially. Furthermore, with
changes in the pricing system, profitability has improved and production
capacity has increased accordingly.
Since 1980, steel-making technology in China has experienced significant
improvements. Measures have been taken to modernize steel enterprises by merging
and expanding existing facilities and improving and upgrading technologies.
Although in the past three years the steel industry has grown rapidly with an
annual average increase in production of 16%, domestic supply is still far from
meeting demand. Therefore China must continue to import a certain amount of
steel from foreign sources. During periods when importation is permitted the
steel products producers in China generally experience decreased sales, as
currently the Chinese steel industry cannot compete with producers of imported
steel products with respect to price and, in some cases, quality.
Management and Employees
- ------------------------
The Board of Directors of HZHD consists of seven members; three directors
appointed by China partner and four directors appointed by the Hong Kong
partner, CCHL. The General Manager, who reports directly to the Board of
Directors of HZHD, is responsible for the day-to-day operations of the joint
venture. HZHD employs approximately 140 employees on a full time basis.
15
<PAGE>
Competition
- -----------
The Company's potential depends on its ability to identify and implement
attractive transportation infrastructure development opportunities in China and
to negotiate successfully to enter into joint ventures to develop or operate
such projects. In this regard, the Company faces competition from infrastructure
development businesses currently operating in China, and in addition from
foreign investors who may wish to invest in infrastructure projects, thereby
competing with the Company.
With respect to transportation infrastructure projects such as toll roads, there
is no assurance that alternate routes which avoid toll charges or a charge lower
toll will not be built.
In late 1995, the Hangzhou section of the Shanghai-Hangzhou Expressway was
opened. The Company expects, based on the report from its traffic consultant,
that this would cause diversion of traffic from the Hangzhou Ring Road and would
reduce the flow through the southern toll plaza of the Hangzhou Ring Road by
approximately 30%. On the other hand, the opening of the north-western and
western sections of the Hangzhou Ring Road would provide new traffic sources.
Furthermore, the Hangzhou Ring Road will also be used by local traffic and as
the city of Hangzhou develops, this component of traffic is expected to grow. In
addition, on the opening of the north-western and western sections of the
Hangzhou Ring Road, heavy vehicles will be discouraged from proceeding on the
road going through the city, and thus diversion to the Hangzhou Ring Road can be
expected to be high, since about half of the vehicles will be affected by the
restrictions on entering Hangzhou.
The Company is also facing competition from the Hangzhou section of the Shanghai
- - Ningbo Expressway, which was opened in 1996. The diversion of traffic from the
Hangzhou Ring Road resulted in reduction of traffic volume from 6.1 million
vehicles in 1995 to 5.2 million vehicles in 1996.
The Company believes that, despite competition, the need of China for further
transportation infrastructure projects will continue to provide opportunities
for the Company to participate in that will yield a satisfactory return.
Research and Development
- ------------------------
The Company did not engage in any research and development activities with
respect to its infrastructure project in fiscal 1996.
Distributions From HZHD
- -----------------------
Applicable Chinese laws and regulations require that, before a Sino-
foreign equity joint venture enterprise (such as each Operating Subsidiary)
distributes profits to investors, it must: (1) satisfy all tax liabilities; (2)
provide for losses in previous years; and (3) make allocations, in proportions
determined at the sole discretion of the Board of Directors, to a general
reserve fund, an enterprise expansion fund and a staff welfare and employee
bonus fund. Since the establishment of HZHD joint venture, each year the Company
generated profits. However, each year both joint venture partners have agreed to
retain the profits within the joint venture. Such profits have been used to
finance the cost of constructing the Hangzhou Toll Road which was completed in
December, 1997.
Operating In China
- ------------------
16
<PAGE>
ECONOMIC POLICIES. General economic conditions in China could have a
significant impact on the Company's Hangzhou Ring Road project. The economy of
China differs in certain material respects from that of the United States,
including its structure, levels of development, capital reinvestment, growth
rate, government involvement, resource allocation, rate of inflation and balance
of payments position. Although the majority of China's productive assets are
still owned by the state, the adoption of economic reform policies since 1978
has resulted in its' gradual reduction in the role of state economic plans,
allocation of resources, pricing and management of such assets. The economic
reform policies have increased emphasis on the utilization of market forces and
rapid growth of the Chinese economy. The success of the Company's infrastructure
project depends in part on the continued economic growth of China.
17
<PAGE>
INFLATION. The general inflation rate in China was approximately 21.7%,
14.8% and 6.3% per annum in 1994, 1995 and 1996 respectively. Accordingly, the
Chinese government has taken steps to control inflation by means of credit
restrictions and an increase in interest rates which, in turn, may lead to a
slow down of the Chinese economy. In recent years, the Chinese economy has
experienced periods of rapid economic growth as well as high rates of inflation,
which in turn, has resulted in the adoption by the Chinese government from time
to time of various corrective measures designated to regulate growth and contain
inflation. Since 1993, the Chinese government has implemented an economic
program to control inflation which has resulted in the tightening of credit
available to Chinese state-owned enterprises.
FOREIGN CURRENCY EXCHANGE. Prior to January 1, 1994, all foreign exchange
transactions involving Renminbi ("Rmb") in China had to take place either
through authorized financial institutions at the official exchange rate set by
the State Administration of Exchange Control ("SAEC"), the department of the
government of China responsible for foreign exchange administration or at local
swap centers at exchange rates largely determined by supply and demand. However,
transactions effected through swap centers still required the prior approval of
the SAEC.
On January 1, 1994, the government of China implemented a controlled
floating exchange rate system based on market supply and demand and established
a managed foreign exchange system. In place of the official rate and swap center
rate, the People's Bank of China ("PBOC") now publishes a daily exchange rate
(the "PBOC Exchange Rate") for Renminbi based on the previous day's dealings.
The financial institutions authorized to deal in foreign currency may enter into
foreign exchange transactions at exchange rates within a set range above or
below the PBOC Exchange Rate, according to market conditions. In furtherance of
these currency reforms, the China Foreign Exchange Trading Center ("CFETC") was
formally established in Shanghai and came into operation in April 1994. The
establishment of CFETC was originally intended to coincide with the phasing out
of the swap centers. However, the swap centers have been retained as an interim
measure and it is envisaged that the local centers will be phased out gradually.
Currently, foreign investment enterprises ("FIE") in China (including
Sino-foreign equity and cooperative joint ventures) are required to apply to the
local bureau of the SAEC for "foreign exchange registration certificates for
foreign investment enterprises". With such foreign exchange registration
certificates (which are annually reviewed by the local bureau of the SAEC) or
with the foreign exchange sales notice from the local bureau of the SAEC, FIEs
may enter into foreign exchange transactions at the swap center, or in the
future, through the unified market when all swap centers are connected to CFETC.
On January 29, 1996, the State Council promulgated the regulations of China
Regarding Foreign Exchange Control (the "Regulations") which came into effect on
April 1, 1996. Pursuant to the Regulations, conversion of RMB into foreign
exchange for the use of recurring items, including the distribution of dividends
and profits to foreign investors of joint ventures, is permissible. FIEs are
permitted to remit its foreign exchange from its foreign exchange bank account
in China on the basis of the relevant joint venture contracts, the board
resolution declaring the distribution of payment of the dividend, etc.
Conversion of RMB into foreign exchange for capital items, such as direct
investment, loans, security investment are still under control.
The exchange rate between the Renminbi and the U.S. Dollar as quoted by the
Bank of China ranged between Rmb 8.33 and Rmb 8.29 to $1.00 in 1996.
18
<PAGE>
LEGAL SYSTEM. Since 1979, many laws and regulations dealing with economic
matters in general and foreign investment in particular have been promulgated in
China. The Chinese Constitution, adopted in 1989, authorizes foreign investment,
and guarantees the "lawful rights and interests" of foreign investors in China.
The trend of legislation over the past twelve years has significantly enhanced
the protection afforded foreign investment and allowed for more active control
by foreign parties of foreign investment enterprises in China.
There can be no assurance, however, that the current trend and economic
legislation toward promoting market reforms and experimentation will not be
slowed, curtailed or reversed, especially in the event of a change in
leadership, social or political disruption, or unforeseen circumstances
affecting China's political, economic or social life.
19
<PAGE>
Despite some progress in developing a legal system, China does not have a
comprehensive system of laws. The interpretation of Chinese laws may be subject
to policy changes reflecting domestic political factors. Enforcement of existing
laws may be uncertain and sporadic, and implementation and interpretation may be
inconsistent. The Chinese judiciary is relatively inexperienced in enforcing the
laws or terms of contracts, leading to a higher than usual degree of uncertainty
in the outcome of litigation. Even where adequate laws exist in China, it may be
impossible to obtain swift and equitable law enforcement, or to obtain
enforcement of a judgment by a court of another jurisdiction. As the Chinese
legal system develops, the promulgation of new laws, changes to existing laws
and the preemption of local regulations by national laws may adversely affect
foreign investors, such as the Registrant.
HZHD's activities in China may be subject, in some cases, to administrative
review and approval by various national, provincial and municipal authorities of
the Chinese government. While China has promulgated an administrative procedural
law permitting redress to the courts with respect to certain administrative
actions, this law appears to be largely untested in its context.
Legal Structure of HZHD
- -----------------------
Hangzhou Zhongche Huantong Development Company, Ltd. was organized under
Chinese law as a Sino-foreign equity joint venture enterprise, which is a
distinct legal entity with limited liability. Such entities are governed by the
Law of China on Joint Ventures Using Chinese and Foreign Investments and
implementing regulations related thereto (the "Equity Joint Venture Law"). The
parties to an equity joint venture have rights in the returns of the joint
venture in proportion to the joint venture interests that they hold. The
operations of equity joint ventures are subject to an extensive body of law
governing such matters as formation, registration, capital contribution, capital
distributions, accounting, taxation, foreign exchange, labor and liquidation.
The transfer or increase of an interest in a Sino-foreign equity joint venture
enterprise requires agreement among the parties to the venture and is effective
upon the approval of relevant government agencies.
Taxation
- --------
A Sino-foreign equity joint venture with a term of 10 years or more and
engaged in production is exempt from state income tax for the first two years
after it attains profitability, and for three years thereafter it is eligible
for a 50% reduction in the state income tax. HZHD will be fully exempted from
Chinese state unified income tax of 30% as well as the local income tax of 3%
for two years starting from the first profit-making year followed by a 50%
reduction of the Chinese state unified income tax for the next three years.
Governance, Operations And Dissolution
- --------------------------------------
Governance, operations and dissolution of a Sino-foreign equity joint
venture enterprise are governed by the Equity Joint Venture Law and by the
parties' joint venture contract and the joint venture's articles of association.
Pursuant to the joint venture contracts and articles of association of HZHD, it
has a 30-year term and is governed by a Board of Directors consisting of seven
members appointed for 4-year terms. CCHL appoints four directors, including the
chairman, to HZHD, while the Chinese joint venture partner appoints the
remaining three directors, including the Vice Chairman.
20
<PAGE>
The Board of Directors of HZHD exercises authority by majority vote over
major corporate decisions, including the appointment of officers, strategic
planning, budgeting, employee compensation and welfare and distribution of
after-tax profits. Management of HZHD is conducted by a management committee
headed by a General Manager and one or two Deputy General Managers, who act on
behalf of HZHD pursuant to the direction and guidance of its Board of Directors.
Pursuant to relevant Chinese Law, certain major actions of HZHD require
unanimous approval by all the directors present at the meeting called to decide
upon the following actions: amendments to it's contract and articles of
association; increases in, or assignment of, the registered capital of the joint
venture; a merger of the joint venture with another entity; or dissolution of
the enterprise.
21
<PAGE>
HZHD is subject to the Sino-foreign Equity Joint Venture Enterprise Labor
Management Regulations. In compliance with these regulations, the management may
hire and discharge employees and make other determinations with respect to
wages, welfare, insurance and discipline of its employees.
Pursuant to the Equity Joint Venture Law, Sino-foreign equity joint venture
enterprises may be terminated in certain limited circumstances, including the
inability of the enterprise to conduct its business owing to a breach by one of
its parties, insolvency, force majeure, or confiscation of the enterprise's
assets by the government. Upon termination, the Board of Directors establishes a
liquidating committee to dissolve the enterprise, which dissolution is subject
to government review and approval.
Resort to Chinese courts to enforce a joint venture contract or to resolve
disputes between the parties over the terms of the contracts is permissible. In
practice, however, disputes between the parties are often resolved by
negotiation. The Company believes that it has a good working relationship with
its joint venture partner and that it will be able to reach agreements with it
on business policies and decisions for HZHD.
Government Regulations
- ----------------------
Any increase in toll rates proposed by HZHD is subject to approval by the
Hangzhou Municipal Government and City of Hangzhou Transportation Department.
There are no assurances that such proposals will be approved by these government
authorities. If such proposals are denied, toll revenues of HZHD will be
reduced.
The government of Zhejiang Province has approved a toll increase of 100% for the
Hangzhou Ring Road, effective from March 1, 1997.
Compliance with Environmental Laws
- ----------------------------------
HZHD is not aware of any Chinese government environmental regulations which
would have an adverse impact on the Company's operations.
ITEM 2 - DESCRIPTION OF PROPERTIES
- ----------------------------------
As of March 31, 1997, the Company had no office or facility for U.S. operations.
The Company shares the office space at 52/F, Bank of China Tower, 1 Garden Road,
Hong Kong and administrative support, with China Strategic Holdings Limited, a
major shareholder of the Company ("CSH"). In fiscal 1996, the Company was
charged RMB 1.29 million by CSH as a management fee for the use of the office
space and staff support.
All land in the PRC is owned by the government. According to the PRC law, land
may be leased (under land use rights) for certain periods of time to businesses.
Therefore, the fact that the Hangzhou Toll Road does not have title but only a
land use right is the norm in the PRC for businesses. While Chinese law
expressly protects the status and rights of Sino-foreign joint venture
enterprises, including their right to use land during the term of their
respective joint venture contracts, the state reserves the right, in extreme and
exceptional circumstances, to terminate the joint venture and provide
compensation therefor. In such an event, a joint venture's right to use land
would terminate and all facilities would revert to the state in exchange for
just compensation. Although management sees little risk in not having title to
the land use rights, no assurances can be given that such land use rights may be
not be terminated by the PRC.
ITEM 3 - LEGAL PROCEEDINGS
- ---------------------------
Neither the Registrant nor its subsidiaries are a party to any material pending
legal proceedings.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to vote of security holders during the fourth quarter
of the fiscal year ended December 31, 1996.
22
<PAGE>
PART II.
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------
,r>
The registrant's Common stock was listed on the New York Exchange ("NYSE")
(symbol : RGL) until December 7, 1994, at which time the NYSE suspended trading
since the Registrant did not meet the continued listing requirements. On
February 9, 1995, the Common Stock was removed from registration and listing on
the NYSE. The Registrant's Common Stock began trading on the NASD Electronic
Bulletin Board since August 1995. The Company's Common Stock trades sporadically
on the NASD's Bulletin Board. The following table sets forth the high and low
prices of the Common Stock as reported in the consolidated transaction reporting
system during the periods indicated : [/R]
Quarter Ended High Low*
- ------------------- ------- ------
March 31,1996 0.0499 0.01
June 30, 1996 0.1 0.01
September 30, 1996 0.03 0.01
December 31, 1996 0.03 0.001
* The low price reflects the average of the bid and asked prices.
As of March 31, 1997, there were approximately 9,000 holders of record of the
shares of the Registrant's Common Stock.
Dividend Policy
- ---------------
The Registrant has never paid a cash dividend. It is the current policy of
the Board to retain earnings, if any, to provide funds for the Company's
operations. The payment of dividends is at the discretion of the Board, and
dividends may be paid only out of current earnings and profits or retained
earnings.
23
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
- ------------------------------------------------------------------------
SELECTED FINANCIAL DATA
- -----------------------
The following table presents the selected financial information of the
Registrant as of and for the years ended December 31, 1994, 1995 and 1996
assuming that the Registrant had owned the shares of Westronix Limited in 1994
and 1995. The information was extracted from the audited consolidated financial
statements of Regal International, Inc. and subsidiaries prepared under US GAAP.
Summary of Financial Results - 1994, 1995 & 1996
Income Statement 1994 1995 1996
- ----------------------- ---- ---- ----
(Amount in thousands) RMB USD RMB USD RMB USD
--- --- --- --- --- ---
Toll revenue 37,614 4,457 37,206 4,472 38,463 4,640
Income from continuing
operations 17,376 2,059 14,704 1,767 13,411 1,618
Net income 12,790 1,515 14,939 1,796 11,876 1,433
Balance Sheet 1995 1996
- ---------------------- ---- ----
(Amount in thousands) RMB USD RMB USD
--- --- --- ---
Current assets 44,873 5,393 35,610 4,296
Total assets 425,523 51,145 656,911 79,242
Current liabilities 32,995 3,966 124,206 14,985
Long-term bank loans 97,500 11,719 179,500 21,652
Shareholders' equity (190,593) (22,908) (82,298) (9,927)
- --------------------
(a) The U.S. dollar convenience translation amount have been translated using
the unified exchange rate quoted by the Bank of China on December 31, 1994, 1995
and 1996 of $1.00 =Rmb 8.44, $1.00 = Rmb 8.32 and $1.00 = Rmb 8.29 respectively.
No representation is made that the Renminbi amounts could have been, or could
be, converted into United States Dollars at those rate on December 31, 1994,
1995 and 1996 or at any other certain rate.
Overview
- --------
The year 1996 marked a substantial change in the business of the Company. In an
effort to benefit from the growing Chinese economy, management decided to
dispose of the oil exploration equipment supply operation and acquire the
Hangzhou toll road in September of 1996. The Company had thereby redirected its
focus from the US industrial product market to the infrastructure project
investment in China.
As of December 31, 1996, Regal International Inc. (the "Company") had the
following subsidiaries (the Company together with its subsidiaries shall be
collectively referred to as the "Group").
Westronix Limited ("WL") - A holding company incorporated in the British Virgin
Islands.
24
<PAGE>
China Construction Holdings Limited ("CCHL") - a company incorporated in
Hong Kong, formally known as China Construction International Group
Limited.
Hangzhou Zhongche Huantong Development Co., Ltd. (the "Operating Subsidiary"
or "Hangzhou Toll Road"), a Sino-foreign equity joint venture located in
Hangzhou, Zhejiang province.
Results of Operation - 1996 compared to 1995
- --------------------------------------------
Summary Financial Information
- -----------------------------
% change
(Rmb in thousands) 1995 1996 from prior year
--------- --------- ---------------
Toll revenue 37,206 38,463 3.4%
General and administrative expenses 10,516 15,646 48.8%
Exchange gain 1,101 350 (68.2%)
Net income 14,939 11,876 (20.5%)
Toll Revenue
- ------------
Toll revenue increased 3.4% to Rmb 38.5 million in 1996 from Rmb 37.2 million in
1995. This was primarily attributable to an average increase of toll fees by
approximately 50%, partially offset by a decrease in traffic flows. Competition
from the Hangzhou section of the Shanghai - Ningbao Expressway, which was opened
this year, resulted in reduction of traffic volume from 6.1 million vehicles in
1995 to 5.2 million vehicles in 1996. The management believes the impact has
already been reflected in 1996. Further decrease of vehicle flows is unlikely.
Management is also optimistic about the future revenue generation ability of
Hangzhou Toll Road as the second phase of the toll road had been completed and
started to collect toll revenue from March, 1997. The toll rates for the second
phase is about double the toll rates for the first phase. In addition, the third
and final phase of the toll road was completed in December, 1997 and should
start to generate revenues in the 1998 fiscal year after obtaining the approval
from the PRC authorities.
General and Administrative Expenses
- -----------------------------------
As compared with last year, general and administrative expenses went up 48.8% to
Rmb 15.6 million. This is due to the fact that additional professional fees were
incurred in 1996 and additional interest expenses incurred by the US$ 13.5
million convertible note in excess of the interest income generated from the
US$900,000 note receivable. Also, a management fee of approximately US$155,000
has been charged by China Strategic Holdings Limited for the year. As far as the
Operating Subsidiary is concerned, general and administrative expenses as a
percentage of toll revenue remained flat and has remained around 28% for the
past two years.
Exchange Gain
- -------------
Exchange gain represents the favorable exchange difference arising from
remeasurement of reporting currencies of the different companies within the
Group into Renminbi, which is the Group's functional currency. Upon year
25
<PAGE>
end revaluation of the amount payable to CSH, which were in terms of foreign
currency, exchange gains were recorded in the past three years due to continual
strengthening of Renminbi.
The exchange rates for Renminbi against U.S. Dollars were 8.44, 8.32 and 8.29 of
1994, 1995 and 1996 respectively, representing an appreciation of Renminbi by
1.4% and 0.4% in 1995 and 1996 respectively, when comparing the exchange rate at
the end of the year with the position at the beginning of the year. As a
consequence, exchange gain dropped substantially from Rmb 1.1 million of a year
earlier to Rmb 0.35 million this year.
Net Income
- ----------
Net income fell 20.5% to Rmb 11.9 million in 1996 from Rmb 14.9 million in 1995.
This was attributable to the combined effect of increased general and
administrative expenses, a decrease in exchange gain and a loss from
discontinued operations.
Loss from discontinued operations represents the operating loss of Regal Bell
and Rubber up to the date of disposal which amounted to approximately
Rmb972,000. Net income in 1996 included a net gain on disposal of investment of
approximately Rmb3,730,000.
26
<PAGE>
Liquidity and Capital Resources
- -------------------------------
In 1996, net cash provided by operating activities and financing activities was
approximately Rmb 3.1 million and Rmb 171.3 million respectively. Net cash used
in investing activities amounted to Rmb 175.1 million, resulting in a net
decrease in cash and cash equivalents of Rmb 0.7 million.
For the past three years, the Company had been able to generate sufficient cash
for its working capital needs. Net cash provided by operating activities dropped
substantially from Rmb 48.9 million in 1995 to Rmb 3.1 million in 1996
principally due to the combination of increases in other receivables by
approximately Rmb 13.4 million and a decrease in accounts payable by Rmb 11.4
million in 1996. The major contributor to the increase in other receivables was
the notes receivable arising from the disposal of Regal Bell and Rubber to New
Regal.
During the year, the Company incurred capital expenditures of Rmb 216.9 million
which was financed through bank borrowings and loans from the Chinese joint
venture partner amounting to Rmb 140.0 million and Rmb 30.8 million
respectively.
As of December 31 1996, the Operating Subsidiary had outstanding capital
commitments for construction contracts of approximately Rmb 91.8 million. The
Operating Subsidiary has been able to raise funds from banks for financing the
construction of the second and third phases of the toll road which are expected
to be completed by the end of fiscal year 1997. Hangzhou Toll Road will collect
toll revenue from all three phases of the toll road. Given its sound credit
history and good banking relationships, management believes that the Operating
Subsidiary will have access to adequate borrowing facilities to meet its cash
requirements in the foreseeable future.
In general, there are no restrictions with respect to the Company and
its Operating Subsidiary to incur additional debts for financing capital
expenditures. However, the Operating Subsidiary being a PRC entity is required
to seek approval from the State Administration of Foreign Exchange, if it is to
accept loans or incur debts in US dollars or other foreign currencies. The
Company does not foresee any major limitations in this requirement. There are no
restrictions on the Company's further pledge of its assets.
At the end of 1996, there were cash and cash equivalents total to
US$2,587,000 which comprised of approximately US$1.1 million at the corporate
level and US$1.5 million at the Operating Subsidiary level.
CSH undertook to provide continuing financial support to the Company to
the extent of CSH's proportionate interest until December 31, 1997. The joint
venture has been able to independently ( and without CSH's involvement) procure
financing for the construction of the Toll Road and has not required any
additional funds from CSH. CSH provided guaranty for $5 million loans to the
joint venture, however, CSH did not provide any other direct contributions.
Effects of Inflation
- --------------------
The general inflation rate in terms of the Retail Price Index in China was
approximately 21.7%, 14.8%, and 6.3% for 1994, 1995 and 1996 respectively.
Management believes that inflation has not had significant impact on the
Operating Subsidiary. Inflation has resulted in upward pressure on wages and
salaries for employees and other operating expenses at the Operating Subsidiary.
However, management does not expect inflation to have a material effect on
profit margins and income, since it has been able to pass on such cost
increments to toll road users by increasing toll rates.
THE YEAR 2000 ISSUE
The Registrant recognized that the Year 2000 issue exists because many computer
systems and application currently use two-digit date fields to designate a year.
As the century date occurs, date sensitive computers will recognize the year
2000 at 1900 or not at all. The inability to recognize or properly treat the
year 2000 may cause computers to process financial and operational information
incorrectly. The Registrant is in the process of assessing the impact, if any,
of the Year 2000 issue on its computers.
The Registrant has not concluded yet its analysis of whether any modifications
to its computers will be necessary. However, the Registrant believes that the
estimated costs, if any, will not have a material impact on the Registrant's
business or financial position.
27
<PAGE>
Results of Operation - 1995 compared to 1994
- --------------------------------------------
Summary Financial Information
- ------------------------------
% change
(Rmb in thousands) 1994 1995 from prior year
-------- --------- ----------------
Toll Revenue 37,614 37,206 (1.1%)
General and administrative expenses 9,616 10,516 9.4%
Exchange gain 3,154 1,101 (65.1%)
Net Income 12,790 14,939 16.8%
Toll Revenue
- ------------
Toll revenue decreased slightly by 1.1% to Rmb 37.2 million in 1995 from Rmb
37.6 million in 1994. There was no material change in toll fees and traffic
volume during the year.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses went up 9.4% to Rmb 10.5 million. As a
percentage of toll revenue, these costs also increased from 25.6% in 1994 to
28.3% in 1995 which was caused by the slight increase of the operation of
Hangzhou Toll Road during 1995.
Exchange Gain
- --------------
Exchange gain represents the favorable exchange difference arising from
remeasurement of reporting currencies of the different companies within the
Group into Renminbi, which is the Group's functional currency. Upon year end
revaluation of the amount payable to CSH, which were in terms of foreign
currency, exchange gains were recorded in the past two years due to continual
strengthening of Renminbi.
The appreciation of the Renminbi in 1995 had slowed down as compared with the
magnitude of upward movement in 1994. As a result, exchange gains in 1995 fell
to Rmb 1.1 million from Rmb 3.2 million in 1994.
Net Income
- ----------
Net income increased 16.8% to Rmb 14.9 million in 1995 from Rmb 12.8 million in
1994. This was mainly due to income of approximately Rmb 235,000 from the
discontinued operations as recorded in 1995, versus a loss of approximately Rmb
4.6 million from discontinued operations recorded in 1994.
Liquidity and Capital Resources
- -------------------------------
In 1995, net cash provided by operating activities and financing activities was
approximately Rmb 48.9 million and Rmb 69.4 million respectively. Net cash used
in investing activities amounted to Rmb 167.1 million, resulting in a net
decrease in cash and cash equivalents of Rmb 48.8 million.
The Company was able to generate sufficient cash for its working capital needs.
Net cash provided by operating activities increased substantially from
approximately Rmb 36.1 million in 1994 to approximately Rmb 48.9 million in
1995, principally due to an increase in accounts payable of Rmb 20.4 million and
partially offset by the reduction in operating income of
28
<PAGE>
Rmb 2.7 million in 1995.
During 1995, the Company incurred capital expenditures of Rmb 166.2 million.
Funds for capital expenditure primarily came from bank borrowings and cash
provided by operating activities.
As of December 31, 1995, the Operating Subsidiary had outstanding capital
commitments for construction contracts of approximately Rmb 228.3 million. The
Operating Subsidiary was able to raise sufficient funds from banks to finance
its projects. Given its sound credit history, future cash generating ability and
superior banking relationships, management believes that the Operating
Subsidiary will have access to adequate borrowing facilities to meet its cash
requirements in the foreseeable future.
29
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The Financial Statements and Supplementary Data for the Registrant for the
period ended December 31, 1996, 1995 and 1994 are set forth hereto and made a
part hereof.
30
<PAGE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
============================================
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1996
TOGETHER WITH AUDITORS' REPORTS
31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO REGAL INTERNATIONAL, INC.:
We have audited the accompanying consolidated balance sheets of Regal
International, Inc. and its subsidiaries as of December 31, 1995 and 1996, and
the related consolidated statements of income, cash flows and changes in
shareholders' equity for the years ended December 31, 1994, 1995 and 1996,
expressed in Chinese Renminbi. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. We did not, however, audit the
financial statements of New Regal International, Inc., Regal Rubber Products,
Inc., and Bell Petroleum Services, Inc. ("Regal Inc., Regal Rubber and Bell"
respectively), as of and for the years ended December 31, 1994 and 1995. Regal
Inc., acquired Westronix Limited in 1996 in a transaction accounted for as a
transfer of assets between companies under common control and also disposed of
Regal Rubber and Bell, as discussed in more detail in Note 1 to the accompanying
consolidated financial statements. The financial statements of Regal Inc., Regal
Rubber and Bell are included in the consolidated financial statements of Regal
Inc., as of and for the years ended December 31, 1994 and 1995 and reflect total
assets and total income of approximately 5.2 percent and 1.6 percent,
respectively of the related consolidated totals for 1995, and approximately 26.4
percent of the related consolidated income for 1994. Those statements were
audited by other auditors whose reports have been furnished to us and our
opinion on the consolidated financial statements of the respective years,
insofar as it relates to the amounts included for those entities, is based
solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit and the reports of
other auditors provide a reasonable basis for our opinion.
32
<PAGE>
The reports of the other auditors referred to above on the financial statements
of Regal Inc., Regal Rubber and Bell for the year ended December 31, 1995, dated
February 9, 1996, included an explanatory paragraph on the ability of these
companies to continue to operate as a going concern. However, in our opinion,
this matter has been resolved by developments at the Company subsequent to the
report issuance date which are explained in Note 1 to the accompanying
consolidated financial statements.
In our opinion, based on our audit and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Regal International, Inc. and its
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for the years ended December 31, 1994, 1995 and
1996 in conformity with generally accepted accounting principles in the United
States of America.
/s/ Arthur Andersen & Co.
Hong Kong,
March 6, 1997.
33
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
----------------------------------------------------
(Amounts in thousands, except number of shares and earnings per common share)
<CAPTION>
Years ended December 31,
--------------------------------------------------
1994 1995 1996 1996
----------- ----------- ----------- -----------
Rmb Rmb Rmb US$
<S> <C> <C> <C> <C>
Toll revenue 37,614 37,206 38,463 4,640
General and administrative expenses (9,616) (10,516) (15,646) (1,887)
Exchange gain 3,154 1,101 350 42
----------- ----------- ----------- -----------
Income from continuing
operations before income taxes
and minority interests 31,152 27,791 23,167 2,795
Provision for income taxes - - - -
----------- ----------- ----------- -----------
Income from continuing
operations before minority
interests 31,152 27,791 23,167 2,795
Minority interests (13,776) (13,087) (13,486) (1,627)
----------- ----------- ----------- -----------
Income from continuing
operations 17,376 14,704 9,681 1,168
Net gain on disposal of investment - - 3,730 450
Income/(Loss) from discontinued
operations (4,586) 235 (1,535) (185)
----------- ----------- ----------- -----------
Net income 12,790 14,939 11,876 1,433
=========== =========== =========== ===========
Earnings per common share (Primary):
-from continuing operations 0.33 0.18 0.16 0.02
-from discontinued operations (0.09) - (0.01) -
----------- ----------- ----------- -----------
0.24 0.18 0.15 0.02
=========== =========== =========== ===========
Earnings per common share (Fully diluted):
-from continuing operations 0.02 0.01 0.01 -
-from discontinued operations (0.01) - - -
----------- ----------- ----------- -----------
0.01 0.01 0.01 -
=========== =========== =========== ===========
Weighted average number of common
shares outstanding 53,330,164 81,806,198 81,806,198 81,806,198
=========== =========== =========== ===========
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on December 31, 1996 of US$1.00 = Rmb8.29. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States Dollars at that rate on December 31, 1996 or at any
other certain rate.
The accompanying notes are an integral part of these consolidated statements of
income.
34
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED BALANCE SHEETS AS OF
---------------------------------
DECEMBER 31, 1995 AND 1996
--------------------------
(Amounts in thousands, except number of shares and share data)
<CAPTION>
Years ended December 31,
-------------------------------------
1995 1996 1996
----------- ----------- -----------
ASSETS Rmb Rmb US$
- -------
<S> <C> <C> <C>
Current assets
Cash and cash equivalents 22,172 21,443 2,587
Prepayments and deferred expenses 452 469 57
Other receivables and other current assets 300 13,698 1,652
Net assets of discontinued operations 21,949 - -
----------- ----------- -----------
Total current assets 44,873 35,610 4,296
----------- ----------- -----------
Prepayments for construction-in-progress 29,789 9,942 1,199
Property, plant and equipment, net 350,861 611,359 73,747
----------- ----------- -----------
Total assets 425,523 656,911 79,242
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------
Current liabilities
Long-term bank loans - current portion - 58,000 6,996
Accounts payable 21,195 9,767 1,178
Accrued expenses and other payables 10,193 56,325 6,794
Taxes other than income 107 114 17
Due to related companies 1,500 - -
----------- ----------- -----------
Total current liabilities 32,995 124,206 14,985
----------- ----------- -----------
Long-term bank loans 97,500 179,500 21,652
Convertible note payable 249,600 249,600 30,108
Due to Chinese joint venture partner 10,500 41,318 4,984
Due to China Strategic Holdings Limited 96,840 2,418 291
Minority interests 128,681 142,167 17,149
Commitments and contingency (Notes 6 & 14)
Shareholders' equity:
Common stock, par value US$0.01 each;
150,000,000 shares authorized; 81,806,198
shares outstanding 6,806 6,806 821
Additional paid-in capital (80,646) 15,773 1,903
Accumulated deficits (116,753) (104,877) (12,651)
----------- ----------- -----------
Total shareholders' equity (190,593) (82,298) (9,927)
----------- ----------- -----------
Total liabilities and shareholders' equity 425,523 656,911 79,242
=========== =========== ===========
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on December 31, 1996 of US$1.00 = Rmb8.29. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States Dollars at that rate on December 31, 1996 or at any
other certain rate.
The accompanying notes are an integral part of these consolidated balance
sheets.
3
35
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
----------------------------------------------------
(Amounts in thousands)
<CAPTION>
Years ended December 31,
--------------------------------------------------
1994 1995 1996 1996
----------- ----------- ----------- -----------
Rmb Rmb Rmb US$
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income
Income from continuing operations 17,376 14,704 9,681 1,168
Net gain on disposal of investment - - 3,730 450
Income/(Loss) from discontinued operations (4,586) 235 (1,535) (185)
Adjustments to reconcile net income to net cash provided by operating
activities:
Minority interests 13,776 13,087 13,486 1,627
Depreciation and amortization 3,740 4,298 4,117 497
Loss on disposal of fixed assets - 19 - -
(Increase) Decrease in assets:
Prepayments and deferred expenses 65 146 (18) (2)
Other receivables and other current assets 3,255 (239) (13,397) (1,616)
Increase (Decrease) in liabilities:
Accounts payable 840 20,355 (11,428) (1,379)
Accrued expenses and other payables 1,648 (3,708) (1,570) (189)
Taxes other than income 17 (7) 7 1
----------- ----------- ----------- -----------
Net cash provided by operating activities 36,131 48,890 3,073 372
----------- ----------- ----------- -----------
Cash flows from investing activities:
Prepayments for construction-in-progress (28,240) (982) 19,846 2,394
Acquisition of property, plant and equipment (41,681) (166,230) (216,912) (26,166)
Changes in net assets of discontinued operations (3,411) 80 21,949 2,648
----------- ----------- ----------- -----------
Net cash used in investing activities (73,332) (167,132) (175,117) (21,124)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds of bank loans 35,500 117,445 140,000 16,888
Repayment of bank loans (9,500) (55,945) - -
Due to related companies 2,500 (1,000) (1,500) (181)
Due to Chinese joint venture partner (25,248) 10,500 30,818 3,717
Due to China Strategic Holdings Limited 68,252 (1,601) 1,997 240
Proceeds from issuance of capital stock 184 - - -
Conversion of preferred stock to common stock 1,490 - - -
Conversion of debt to common stock 6,665 - - -
----------- ----------- ----------- -----------
Net cash provided by financing activities 79,843 69,399 171,315 20,664
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 42,642 (48,843) (729) (88)
Cash and cash equivalents, at beginning of year 28,373 71,015 22,172 2,675
----------- ----------- ----------- -----------
Cash and cash equivalents, at end of year 71,015 22,172 21,443 2,587
=========== =========== =========== ===========
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on December 31, 1996 of US$1.00 = Rmb8.29. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States Dollars at that rate on December 31, 1996 or at any
other certain rate.
The accompanying notes are an integral part of these consolidated statements of
cash flows.
36
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
----------------------------------------------------
(Amounts in thousands, except number of shares)
<CAPTION>
Shares of
Convertible Shares of
Preferred Common
Stock Stock Additional
(US$0.1 par (US$0.01 par Preferred and Paid-in Accumulated
value) value) Common Stock Capital Deficits Total
----------- ----------- ----------- ----------- ----------- -----------
Number Number Rmb Rmb Rmb Rmb
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1993 2,630,134 53,330,164 6,625 (88,801) (144,482) (226,658)
Conversion of
preferred stock to
common stock (2,630,134) 8,423,952 (1,487) 1,490 - 3
Conversion of debt to
common stock - 20,052,082 1,668 6,665 - 8,333
Net income - - - - 12,790 12,790
----------- ----------- ----------- ----------- ----------- ----------
Balance at
December 31, 1994 - 81,806,198 6,806 (80,646) (131,692) (205,532)
Net income - - - - 14,939 14,939
----------- ----------- ----------- ----------- ----------- ----------
Balance at
December 31, 1995 - 81,806,198 6,806 (80,646) (116,753) (190,593)
Contribution by China
Strategic Holdings
Limited ("CSH") - - - 96,419 - 96,419
Net income - - - - 11,876 11,876
----------- ----------- ----------- ----------- ----------- ----------
Balance at
December 31, 1996 - 81,806,198 6,806 15,773 (104,877) (82,298)
=========== =========== =========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements of
changes in shareholders' equity.
37
<PAGE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
- ---------------------------------------------
Regal International, Inc. ("Regal" or the "Company") was incorporated in the
State of Delaware, the United States of America and is listed on the National
Association of Securities Dealers Automated Quotations ("NASDAQ") with an
authorized share capital of US$1,500 or 150 million shares of US$0.01 each.
Pursuant to an Acquisition Agreement dated February 8, 1996 between Regal,
Acewin Profits Limited ("AP"), a British Virgin Islands corporation and China
Strategic Holdings Limited ("CSH"), a company incorporated in Hong Kong and is
listed on the Stock Exchange of Hong Kong Limited, Regal acquired all the issued
and outstanding shares of AP at a consideration of US$13.5 million satisfied
through the issuance of a US$13.5 million Convertible Note (the "Convertible
Note A") by Regal to Horler Holdings Limited ("Horler"), a Hong Kong company and
a wholly-owned subsidiary of CSH, bearing interest at 9% per annum after an
initial 6-month interest-free period. AP was a wholly-owned subsidiary of CSH
before the transfer and AP's sole asset was a 55% equity interest in Wuxi CSI
Vibration Isolator Co. Ltd., a Sino-foreign equity joint venture incorporated in
the People's Republic of China, held through an intermediate Hong Kong company,
China Machine (Holdings) Limited.
On February 15, 1996, CSH appointed three directors to fill vacancies on the
Board of Directors created by the resignation of three out of the five directors
of Regal effective on the date of consummation of the transaction whereby Regal
acquired all the outstanding share capital of AP. On March 8, 1996, Horler
purchased 40,500,000 shares of common stock representing 49.51% of the then
issued and outstanding share capital of Regal from a major shareholder of the
Company thus becoming its major and controlling shareholder.
Pursuant to a Purchase Agreement dated September 11, 1996 between Regal, an
unrelated company incorporated in the Netherlands and CSH, Regal sold all the
issued and outstanding shares of AP at a consideration of US$13.95 million. The
proceeds were then used to repay the Convertible Note A principal of US$13.5
million, on September 13, 1996. The realized gain of US$450 on the disposal of
AP has been included as part of "Net gain on disposal of investment " in the
Company's consolidated statements of income for the year ended December 31,
1996.
Pursuant to another Asset Purchase Agreement ("the Agreement") dated February 8,
1996 between Regal and Regal (New) International, Inc. ("New Regal"), the
Company sold and transferred the operating assets and real property of Regal
existing as of January 31, 1996 to New Regal in exchange for US$2.5 million and
New Regal's assumption of all liabilities incurred, accrued or arising from the
Operations of Regal prior to the closing date of this transaction, other than
the Convertible Note A.
38
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONT'D)
- -------------------------------------------------------
Pursuant to the Agreement, the US$2.5 million portion of the purchase price was
paid as follows: US$800 in cash and the balance by delivery of two promissory
notes, one in the principal amount of US$900 (the "US$900 Note") and the second
in the principal amount of US$800 (the "US$800 Note"). The US$900 Note bears
interest at 9% per annum and is payable in sixty equal monthly installments of
principal and interest. The US$800 Note bears no interest and is due and payable
in one installment on January 31, 2001. The realized loss in connection with
this transaction amounted to approximately US$69 and has been included as part
of "Income/(Loss) from discontinued operations" in the Company's consolidated
statements of income for the year ended December 31, 1996.
Pursuant to an Acquisition Agreement dated September 10, 1996 between Regal,
Westronix Limited ("WL"), a wholly owned subsidiary of CSH, Regal acquired all
the issued and outstanding shares of WL at a consideration of US$30 million to
be satisfied through the issuance of a US$30 million Convertible Note (the
"Convertible Note B") by Regal to Horler bearing interest at 9% per annum after
an initial 6-month interest-free period. The principal and any unpaid interest
owing on the Convertible Note B can be converted into shares of the Common Stock
of Regal ("Common Stock") at a conversion price of US$0.0302 per share. On
conversion, CSH would hold approximately 96.16% of the outstanding shares of the
Company. WL's sole asset is a 51% equity interest in Hangzhou Zhongche Huantong
Development Co. Ltd., a Sino-foreign equity joint venture incorporated in the
People's Republic of China, held through an intermediate Hong Kong company,
China Construction Holdings Limited.
As of December 31, 1996, the Company had the following subsidiaries:
Westronix Limited ("WL") - a holding company incorporated in the British Virgin
Islands.
China Construction Holdings Limited ("CCHL") - a company incorporated in Hong
Kong and was formally known as China Construction International Group Limited.
Hangzhou Zhongche Huantong Development Co., Ltd. (the "Operating Subsidiary" or
"Hangzhou toll road"), a Sino-foreign equity joint venture located in Hangzhou,
Zhejiang Province, the People's Republic of China ("the PRC").
The Company holds a 100% interest in WL. WL was incorporated on July 3, 1996
with an authorized share capital of 50,000 shares with a par value of US$1 each.
One share was issued at par value to CSH which was subsequently transferred to
Regal pursuant to a shareholder's resolution dated September 10, 1996. WL, holds
a 100% interest in CCHL which in turn holds a 51% interest in Hangzhou toll
road. WL's interest in CCHL and Hangzhou toll road was transferred from CSH
pursuant to a shareholders' resolution dated August 28, 1996.
39
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONT'D)
- -------------------------------------------------------
Hangzhou toll road is a Sino-foreign equity joint venture enterprise established
on June 23, 1993, which formally began business operations in September 1993 in
the PRC. The total cash consideration paid by CCHL for its interest in Hangzhou
toll road amounted to Rmb102,000. Tolls collected from the existing portion of
the toll road ("the first phase"), which was injected by the Chinese joint
venture partner, Hangzhou City Transportation Development Company, and cash
injected by CSH will be used to finance the construction of the second and third
phases of the toll road (the "CIP Projects") which are expected to be completed
by the end of fiscal year 1997. Hangzhou toll road will collect toll from all
three phases of the toll road after the CIP Projects are completed.
Key provisions of the joint venture agreement of Hangzhou toll road include:
* the joint venture period is 30 years from the date of formation;
* the profit and loss sharing ratio is the same as the percentage of equity
interest; and
* the Board of Directors consists of 7 members : 4 designated by CCHL and 3
designated by Hangzhou City Transportation Development Company.
The acquisition of the Operating Subsidiary by CCHL was accounted for by the
purchase method of accounting. The tangible assets were valued at their
estimated fair value. The results of the Operating Subsidiary are included in
the consolidated statements of income from the effective date of the joint
venture, June 23, 1993. No revenue was generated from the toll road before the
formation of the joint venture.
Hangzhou toll road operates in the PRC and accordingly is subject to special
considerations and significant risks not typically associated with investments
in equity securities of United States and Western European companies. These
include risks associated with, among others, the political, economic and legal
environments and foreign currency exchange. These are described further in the
following paragraphs:
POLITICAL ENVIRONMENT
The value of the Company's interests in the Operating Subsidiary may be
adversely affected by changes in policies by the Chinese government including,
among others: changes in laws, regulations or the interpretation thereof;
confiscatory taxation; restrictions on foreign currency conversion, imports or
sources of suppliers; or the expropriation or nationalization of private
enterprises.
40
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONT'D)
- -------------------------------------------------------
ECONOMIC ENVIRONMENT
The economy of the PRC differs significantly from the economies of the United
States and Western Europe in such respects as structure, level of development,
gross national product, growth rate, capital reinvestment, resource allocation,
self-sufficiency, rate of inflation and balance of payments position, among
others. Only recently has the Chinese government encouraged substantial private
economic activities.
The Chinese economy has experienced significant growth in the past five years,
but such growth has been uneven among various sectors of the economy and
geographic regions. Actions by the Chinese central government to control
inflation have significantly restrained economic expansion recently. Similar
actions by the central government of the PRC in the future could have a
significant adverse effect on economic conditions in the PRC and the economic
prospects for the Operating Subsidiary and the Company.
FOREIGN CURRENCY EXCHANGE
The Chinese central government imposes control over its foreign currency
reserves through control over imports and through direct regulation of the
conversion of its national currency into foreign currencies. As a result, the
Renminbi is not freely convertible into foreign currencies.
The Operating Subsidiary conducts substantially all of its business in the PRC,
and its financial performance and condition are measured in terms of Renminbi.
The Operating Subsidiary's source of income, toll revenue, is denominated in
Renminbi. Revenues and profits have to be converted to United States Dollars or
Hong Kong Dollars to pay dividends to the Company. Should the Renminbi devalue
against the United States Dollar, such devaluation would have a material adverse
effect on the Company's profits measured in foreign currency and reduce the
foreign currency that could be repatriated by the Operating Subsidiary to the
Company. The Company currently is not able to hedge its Renminbi - United States
Dollars exchange rate exposure in the PRC because neither the banks in the PRC
nor any other financial institutions authorized to engage in foreign exchange
transactions offer forward exchange contracts.
LEGAL SYSTEM
Since 1979, many laws and regulations dealing with economic matters in general
and foreign investment in particular have been enacted in the PRC. However, the
PRC still does not have a comprehensive system of laws and enforcement of
existing laws may be uncertain and sporadic.
TOLL REVENUE
Any increase in toll rates proposed by the Operating Subsidiary is subject to
approval by the Hangzhou Municipal Government and Hangzhou City Transportation
Department. However, there is no assurance that proposed increases will be
approved by these government authorities. If such proposals are denied, profit
margins of the Operating Subsidiary could be reduced.
41
<PAGE>
2. BASIS OF PRESENTATION
- -----------------------------
The accompanying consolidated financial statements were prepared in accordance
with generally accepted accounting principles in the United States of America
("U.S. GAAP"). This basis of accounting differs from that used in the statutory
financial statements of the Operating Subsidiary, which were prepared in
accordance with the accounting principles and the relevant financial regulations
applicable to joint venture enterprises as established by the Ministry of
Finance of China ("PRC GAAP").
The principal adjustments made to conform the statutory financial statements of
the Operating Subsidiary to U.S. GAAP included the following:
* Provision of depreciation on roads and bridges.
* Recognition of toll profit on the accrual basis and upon the
commencement of operations as toll profit has been deferred until the
commencement of the entire toll road operation under PRC GAAP.
The transfer of CSH's equity interests in CCHL to WL and the transfer of CSH's
equity interests in WL to Regal were accounted for as reorganisations of
companies under common control similar to a pooling of interests. The
accompanying consolidated financial statements of the Company have been restated
to present the transfers of CSH's interests in CCHL to WL and in WL to Regal as
if they had occurred on the date of formation of the Operating Subsidiary, June
23, 1993. The acquisition of the Operating Subsidiary was financed by advances
from CSH. In 1996, the advances payable to CSH in relation to the above
acquisition was capitalized and treated as an increase in additional paid-in
capital. In addition, due to the specific requirements of the U.S. GAAP for
transfers of assets between entities under common control, the difference of
Rmb147,600 between the historical cost of the investment of CSH in Hangzhou toll
road and the Company's acquisition cost was treated as a deemed dividend paid to
CSH in 1993.
Regal's acquisition of CSH's interests in AP and its subsequent disposal have
been accounted for using the purchase method of accounting. The results of
operations of AP and its subsidiaries have not been consolidated into the
financial statements for the year ended December 31, 1996 given the temporary
nature of the holding.
Income from the historical operations of Regal for the years ended December 31,
1994, 1995 and 1996 which included income from oilfield, marine rubber, custom
molded and safety services, has been reclassified as "Income/(Loss) from
discontinued operations" in the consolidated statements of income as a result of
the disposal of the related net assets to New Regal in 1996. Accordingly, net
assets related to the discontinued operations of Regal as of December 31, 1994,
and 1995 have also been reclassified as "Net assets of discontinued operations"
in the accompanying financial statements.
42
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------
a. BASIS OF CONSOLIDATION
----------------------
The consolidated financial statements include the financial statements
of the Company and its majority-owned subsidiaries. All material
intercompany balances and transactions have been eliminated on
consolidation.
b. TOLL REVENUE
------------
Toll revenue represents the gross receipts at the toll stations, net of
business tax calculated at 3.0% of the gross toll receipts.
c. CASH AND CASH EQUIVALENTS
-------------------------
Cash and cash equivalents include cash on hand, demand deposits with
banks and liquid investments with an original maturity of one year or
less. Cash and cash equivalents included United States Dollar deposits
of US$1,078 (Rmb8,967) and US$67 (Rmb555) as of December 31, 1995 and
1996 respectively. Deposits of US$700 (Rmb5,824) as of December 31, 1995
were used to guarantee bank loans of a related company.
d. PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation of property, plant and equipment is computed
using the straight-line method over the assets' estimated useful lives,
taking into account the estimated residual value of 10% (except for
roads and bridges which have no residual value) of the cost of the
assets. The estimated useful lives are as follows:
Roads and bridges 30 years
Buildings 20 years
Machinery and equipment 5 years
Motor vehicles 5 years
Furniture, fixtures and office equipment 5 years
Construction-in-progress ("CIP" see also Note 4) represents new roads
and bridges under construction and plant and machinery pending
installation. This includes the costs of construction, the costs of
plant and machinery and interest charges (net of interest income),
arising from borrowings used to finance these assets during the period
of construction or installation. Interest capitalized amounted to
Rmb6,778 and Rmb25,035 for the years ended December 31, 1995 and 1996.
The Operating Subsidiary retains the ownership interest in the road and
bridges constructed during the joint venture period of 30 years from the
date of formation. Upon expiration of the joint venture period, in
accordance with the joint venture agreement, the roads and bridges owned
by the Operating Subsidiary will be surrendered to the Chinese joint
venture partner.
43
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- ------------------------------------------------------------
e. TAXATION: INCOME TAXES
----------------------
No provision for withholding or U.S. federal income taxes or tax
benefits on the undistributed earnings of the subsidiaries and/or losses
of the Operating Subsidiary has been provided as the earnings of the
subsidiaries have been reinvested and, in the opinion of management,
will continue to be reinvested indefinitely.
WL was incorporated under the laws of the British Virgin Islands, and
under current British Virgin Islands laws, WL is not subject to tax on
income or on capital gains.
The Company and its subsidiaries provide for Hong Kong profits tax on
the basis of their income for financial reporting purposes, adjusted for
income and expense items which are not assessable or deductible for
profits tax purposes. The Company and its subsidiaries have had no
profits assessable for Hong Kong profits tax purposes.
Hangzhou toll road is subject to Chinese income taxes at the applicable
tax rate for Sino-foreign equity joint venture enterprises (currently
33%) on the taxable income as reported in its statutory accounts
adjusted in accordance with the relevant income tax laws. Since it has a
joint venture term of more than 10 years and is engaged in
infrastructure construction, Hangzhou toll road will be fully exempted
from Chinese state unified income tax of 30% as well as the local income
tax of 3% for two years starting from the first profit-making year
followed by a 50% reduction of the Chinese state unified income tax for
the next three years ("tax holiday").
If the Operating Subsidiary had not been in the tax holiday period, the
Company would have recorded additional income tax expense of Rmb10,000,
Rmb9,901 and Rmb10,176 and net income of the Company would have been
reduced by Rmb5,100, Rmb5,050 and Rmb5,190 for the years ended December
31, 1994, 1995 and 1996 respectively (See Note 14).
The Company provides for deferred income taxes using the liability
method, by which deferred income taxes are recognized for all
significant temporary differences between the tax and financial
statement bases of assets and liabilities. The tax consequences of those
differences are classified as current or non-current based upon the
classification of the related assets or liabilities in the financial
statements.
f. TAXATION: BUSINESS TAX
----------------------
In December 1993, the Chinese government promulgated several major new
tax regulations which came into effect on January 1, 1994. These new tax
regulations replaced a number of former tax laws and regulations
including the Consolidated Industrial and Commercial Tax ("CICT"). Under
these new tax regulations, the Operating Subsidiary is subject to
business tax which replaced the CICT and is now the principal direct tax
on the toll revenue generated. The business tax rate applicable to the
Operating Subsidiary is 3.0%.
44
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- ------------------------------------------------------------
g. FOREIGN CURRENCY TRANSLATION
----------------------------
The functional currency of the group and the Company is Renminbi.
The Operating Subsidiary maintains its books and records in Renminbi.
Foreign currency transactions are translated into Renminbi at the
applicable unified rates of exchange or the applicable rates of exchange
quoted by the applicable foreign exchange adjustment center ("swap
center"), prevailing at the dates of the transactions. Monetary assets
and liabilities denominated in foreign currencies are translated into
Renminbi using the applicable unified rates of exchange or the
applicable swap center rates prevailing at the balance sheet dates. The
resulting exchange differences are included in the determination of
income.
The Company's registered capital is denominated in and its reporting
currency is the United States Dollars. For financial reporting purposes,
the United States Dollars capital injection amounts have been translated
into Renminbi at the unified exchange rate as of December 31, 1995.
The Renminbi is not freely convertible into foreign currencies. All
foreign exchange transactions involving Renminbi must take place either
through the Bank of China or other institutions authorized to buy and
sell foreign currencies, or at a swap center. Before January 1, 1994,
the exchange rates used for transactions through the Bank of China and
other authorized institutions were set by the government (the "official
exchange rate") from time to time whereas the exchange rates available
at the swap centers (the "swap center rates") were determined largely by
supply and demand. The Chinese government announced the unification of
the two-tier exchange rate systems in December 1993 effective January 1,
1994. The unification brought the official exchange rate of the Renminbi
in line with the swap center rate. The unification did not have a major
impact on the consolidated financial statements of the Company under
U.S. GAAP.
Sino-foreign equity joint venture enterprises can enter into exchange
transactions at swap centers. Payment for imported materials and
remittance of earnings outside of the PRC are subject to the
availability of foreign currency which is dependent on the foreign
currency denominated earnings of the entity or must be arranged through
a swap center or designated foreign exchange banks. Approval for
exchange at the swap center is granted to joint venture enterprises for
valid reasons such as the purchase of imported materials and remittance
of earnings.
The official exchange rates, unified exchange rates and Shanghai swap
center rates as of December 31, 1994, 1995 and 1996 were as follows:
1994 1995 1996
------------ ------------ ------------
Rmb equivalents of US$1
Official exchange rate N/A N/A N/A
Unified exchange rate 8.44 8.32 8.29
Shanghai swap center rate 8.44 8.32 8.29
45
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- ------------------------------------------------------------
h. DEDICATED CAPITAL
-----------------
In accordance with the relevant laws and regulations for Sino-foreign
equity joint venture enterprises, the Operating Subsidiary maintains
discretionary dedicated capital, which includes a general reserve fund,
an enterprise expansion fund and a staff welfare and incentive bonus
fund. The Board of Directors of the Operating Subsidiary will determine
on an annual basis the amount of the annual appropriations to dedicated
capital. For the period from January 1, 1994 to December 31, 1996, the
Operating Subsidiary did not report any profits in the statutory
financial statements, and accordingly, no appropriation to dedicated
capital has been made.
i. USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could
differ from those estimates.
j. EARNINGS PER COMMON SHARE
-------------------------
The calculation of primary earnings per common share is based on the
weighted average number of common shares outstanding during the year
ended December 31, 1994, 1995 and 1996. The calculation of fully diluted
earnings per common share is based on the common shares outstanding
during the years ended December 31, 1994, 1995 and 1996 adjusted for the
assumed conversion of the Company's US$30 million convertible Note B as
mentioned in Note 1 above and exercise of the stock options mentioned in
Note 12.
The number of shares used in the computation was as follows:
1994 1995 1996
------------- ------------- -------------
Primary EPS computation 53,330,164 81,806,198 81,806,198
Fully diluted EPS computation 1,047,817,647 1,076,293,694 1,075,293,694
46
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT
- -------------------------------------
December 31, December 31,
1995 1996
--------------- ---------------
Rmb Rmb
Roads and bridges 109,020 110,784
Buildings 148 148
Machinery and equipment 475 3,804
Motor vehicles 2,121 3,084
Furniture, fixtures and office equipment 38 38
Construction-in-progress 247,346 505,734
LESS: Accumulated depreciation (8,287) (12,233)
--------------- ---------------
Net book value 350,861 611,359
=============== ===============
5. LONG-TERM BANK LOANS
- ----------------------------
Long-term bank loans, all of which are unsecured, bear average interest rates of
approximately 14.87% and 14.66% as of December 31, 1995 and 1996 respectively
and are repayable as follows:
December 31, December 31,
1995 1996
--------------- ---------------
Rmb Rmb
1997 58,000 58,000
1998 20,000 25,000
1999 19,500 54,500
2000 - 45,000
2001 - 55,000
--------------- ---------------
Total 97,500 237,500
=============== ===============
All the long-term bank loans are denominated in Renminbi. Loans amounting to
Rmb19,500 and Rmb159,500 as of December 31, 1995 and 1996 respectively are
guaranteed by a related company.
6. COMMITMENTS
- -------------------
As of December 31, 1995 and 1996, the Operating Subsidiary had outstanding
capital commitments for construction contracts related to its CIP projects
amounting to approximately Rmb228,270 and Rmb91,783 respectively.
47
<PAGE>
7. DISTRIBUTION OF PROFITS
- -------------------------------
Dividends from the Operating Subsidiary will be declared based on the profits as
reported in the statutory financial statements. Such profits will be different
from the amounts reported under U.S. GAAP. As of December 31, 1996, the
Operating Subsidiary had no available retained earnings for distribution.
In the opinion of management, any undistributed earnings and/or losses of the
Operating Subsidiary have been reinvested and will continue to be reinvested
indefinitely.
8. PROVISION FOR INCOME TAXES
- ----------------------------------
The reconciliation of the effective income tax rate based on income before
provision for income taxes and minority interests stated in the consolidated
statements of income to the statutory income tax rate in Hong Kong, the British
Virgin Islands, the PRC and the U.S. is as follows:
1994 1995 1996
------------ ------------ ------------
Weighted average statutory tax rate 34.8% 31.6% 35.5%
Effect of tax holiday (34.8%) (31.6%) (35.5%)
------------ ------------ ------------
Effective tax rate - - -
============ ============ ============
Provision for income taxes consists of:
1994 1995 1996
------------ ------------ ------------
Rmb Rmb Rmb
Current - - -
Deferred - - 2,082
Adjustment of valuation allowance - - (2,082)
------------ ------------ ------------
- - -
============ ============ ============
The valuation allowance refers to the portion of the deferred tax assets that
are not currently realizable. The realization of these benefits depends upon the
ability of the Company to generate income in future years. No provision or
benefit for deferred income taxes was recognized in 1994, 1995 and 1996.
48
<PAGE>
9. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
- ---------------------------------------------------
The Operating Subsidiary guaranteed bank borrowings of a related company of CSH
in an amount of Rmb10,000 and Rmb75,000 as of December 31, 1995 and 1996
respectively.
CSH has undertaken to provide continuing financial support to the Company to the
extent of CSH's interest in the Company for a period ending on December 31,
1997.
The Company paid management fees of US$155 (RMB1,288) to CSH during 1996 for
administrative services rendered on behalf of the Company by CSH.
10. DUE TO CHINESE JOINT VENTURE PARTNER
- --------------------------------------------
Balances due to the Chinese joint venture partner as of December 31, 1995 and
1996 represented amounts borrowed from the Chinese joint venture partner to
finance the CIP Projects.
These amounts are unsecured, non-interest bearing and have no fixed repayment
date.
11. RETIREMENT PLANS
- ------------------------
As stipulated by the regulations of the Chinese government, all of the Chinese
staff of the Operating Subsidiary are entitled to an annual pension on
retirement, which is equal to their basic salaries at their retirement dates.
The Chinese government is responsible for the pension liability to retired
staff. The Operating Subsidiary is only required to make specified contributions
to the state-sponsored retirement plan calculated at 23% of the basic salary of
the staff. The expense reported in the consolidated financial statements related
to these arrangements was Rmb34, Rmb64 and Rmb99 for the years ended December
31, 1994, 1995 and 1996 respectively.
49
<PAGE>
12. STOCK OPTIONS
- ---------------------
The following tables summarize the movement of share options of the Company.
During 1987 and 1988, the Company issued five-year Common Stock options in
conjunction with its financing activities to various promissory note holders and
other selected creditors. During 1989, the Company issued five and ten-year
stock options in an additional financing and extension of debt.
COMMON STOCK OPTIONS
1995 1996
--------------- ---------------
Shares under option at beginning of year 150,000 150,000
Expired - -
--------------- ---------------
Shares under option at end of year 150,000 150,000
=============== ===============
Average exercise price of outstanding options $ 0.156 $ 0.156
=============== ===============
Exercisable at end of year 150,000 150,000
=============== ===============
In December 1991 the Board of Directors approved the issuance of Common Stock
options to members of the Board of Directors. The options were to expire in five
years and be issued at 110% of market value on the date of grant.
COMMON STOCK OPTIONS
1995 1996
--------------- ---------------
Options at beginning of year 1,000,000 1,000,000
Issued 300,000 -
Expired (300,000) (1,000,000)
--------------- ---------------
Shares under option at end of year 1,000,000 -
=============== ===============
Average exercise price of outstanding options $ 0.14 -
=============== ===============
Exercisable at end of year 1,000,000 -
=============== ===============
50
<PAGE>
13. OTHER SUPPLEMENTAL INFORMATION
- --------------------------------------
a) The following items are included in the consolidated statements of income:
December 31, December 31, December 31,
1994 1995 1996
--------------- --------------- ---------------
Rmb Rmb Rmb
Business tax 1,163 1,171 1,211
b) Non-cash investing and
financing activities:
Capitalization of advances
payable to CSH as - - 96,419
additional paid-in capital
14. CONTINGENCY
- -------------------
The Operating Subsidiary has obtained an approval from the local government to
offset the toll revenue collected from the first phase of the toll road against
the construction-in-progress balances until the CIP Projects are completed by
the end of 1997. Thus, the tax holiday has been deferred until the CIP Projects
are completed. As such, the Operating Subsidiary reported zero net profits in
its statutory financial statements starting from the commencement of operations
in 1993 and will continue to do so until the CIP Projects are completed at the
end of 1997. The Company plans to record the net profits offset against the
construction-in-progress account during 1993 to 1997 into income of the
statutory financial statements of the Operating Subsidiary during 1998 and/or
1999 fiscal years (i.e. the first two tax exemption years of the tax holiday).
This plan is subject to the approval of the local tax bureau. Should such
approval not be obtained from the local tax bureau, a tax liability amounting to
approximately Rmb5 million and Rmb5 million for the years ended December 31,
1995 and 1996 respectively may arise. In the opinion of the directors, it is not
probable that a liability will arise.
51
<PAGE>
FINANCIAL STATEMENTS OF REGAL INTERNATIONAL, INC.
FOR YEARS ENDED DECEMBER 31, 1995 AND 1994
51
<PAGE>
PANNELL
KERR
FORSTER
of
TEXAS, P.C.
Certified Public Accountants
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Regal International, Inc.
Corsicana, Texas
We have audited the consolidated balance sheets of Regal International, Inc. and
subsidiaries ("the Company") as of December 31, 1995 and 1994, and the related
consolidated Statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, an a test basis, evidence supporting
the amounts and disclosures In the financial statements.
All audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial petition of Regal
International, Inc. and subsidiaries at December 31, 1995 and 1994 and the
consolidated results of their operations and their cash flows for the years then
ended In conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has historically incurred
operating losses which raises substantial doubt about its ability to continue as
a going concern. There is no assurance that the Company will be able to realize
its recorded assets and liquidate its liabilities in the ordinary course of
business. Management's plans are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Pannell Kerr Forster of Texas, P.C.
PANNELL KERR FORSTER OF TEXAS, P,C.
February 9, 1996
5847 San Felipe, Suite 2300 Houston, Texas 77057 - Telephone (713) 700-8007
Fax (713) 764-3360
53
<PAGE>
REGAL INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Year Ended December
---------------------
1995 1994
------- -------
ASSETS
CURRENT ASSETS:
Cash $ 11 $ 200
Restricted Cash 19 15
Accounts Receivable, less
allowance for doubtful accounts
of $53 and $74, respectively 1,583 907
Inventories 2,460 2,426
Prepaid expenses 219 69
-------- -------
Total Current Assets 4,292 3,617
PROPERTY PLANT AND EQUIPMENT, less
accumulated depreciation of $8,230 and
$8,448 respectively 1,836 2,229
OTHER ASSETS 16 36
-------- --------
TOTAL ASSETS $ 6,144 $ 5,882
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt, including
$577 and $248 due to related parties,
respectively $ 865 $ 541
Accounts payable 752 508
Accrued Interest 10 35
Other accrued expenses 585 415
-------- --------
Total Current Liabilities 2,212 1,499
LONG-TERM DEBT, including $819 and $1,036
due to related parties. Respectively 1,294 1,773
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $.O1 par value: 150,000,000
shares authorized;. 81,806,211 shares issued
and outstanding in 1995 and 81,803,198 in 1994 818 818
Additional paid-in capital 20,307 20,307
Deficit (18,487) (18,515)
-------- --------
Total Stockholders' Equity 2,638 2,610
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 6,144 $ 5,882
======== ========
The accompanying notes are an Integral part of these financial statements..
54
<PAGE>
REGAL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
Year Ended December 31
-------------------------
1995 1994
----------- -----------
REVENUES $ 7,591 $ 7,091
COSTS AND EXPENSES:
Cost of Sales 5,022 4,831
Selling and marketing 1,402 1,240
General and administrative 1,258 1,369
----------- -----------
7,682 7,440
----------- -----------
OPERATING LOSS (91) (349)
----------- -----------
OTHER INCOME (EXPENSES)
Interest Expense, Including $131 and
$189 to related parties (328) (396)
Other Income
Gain on sale of fixed assets 345 8
Gain on settlements of liabilities 11 116
Other 91 89
---------- ----------
NET INCOME (LOSS) $ 28 $ (532)
========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 81,806 53,331
========== ==========
NET INCOME (LOSS) PER COMMON SHARE $ 0.000 $ (0.010)
========== ==========
The accompanying notes are an integral part of these financial statements,
55
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share data)
<CAPTION>
Convertible
Preferred stock
Series A and B Common Stock Additional
----------------------- --------------------
Number of Number of Paid-in
shares Amount shares Amount Capital Deficit Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER
31, 1993 2,630,134 $ 263 53,330,164 $ 633 $ 19,327 $ (17,983) $ 2,140
Conversion of
Series B preferred
Stock to Common
Stock (130,134) (13) 923,952 9 4 -
Conversion of Series
A preferred Stock
to Common Stock (2,500,000) (250) 7,500,000 75 175
Conversion of
$1,002,604 Harlequin
Debt to Common Stock 20,052,082 201 801 1,002
Net Loss (532) (532)
---------- ------- ---------- ------ --------- -------- ---------
BALANCE, DECEMBER
31, 1994 - - 81,806,198 818 20,307 $ (18,515) $ 2,610
---------- ------- ---------- ------ ---------- --------- ----------
Conversion of Series B Preferred
Stock to Common Stock 13
Net Income 28 28
--------- -------- ---------- ------ ---------- --------- ----------
BALANCE, DECEMBER
31, 1995 - $ - 81,806,211 $ 818 $ 20,307 $ (18,487) $ 2,638
========= ======== ========== ====== ========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
56
<PAGE>
REGAL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
----------------------
1995 1994
-------- --------
Cash flows from operating activities:
Net Income (loss): $ 28 $ (532)
Adjustments to reconcile net Income (loss) to
net cash provided by (used in) operations:
Depreciation 317 338
Provision for losses on accounts receivable 24 3
Gain on sale of assets (345) (44)
Gain on debt restructured (11) (8)
Changes In assets and liabilities:
Decrease (increase) in accounts receivable (700) 792
Decrease (increase) in restricted cash (4) 31
Decrease in Inventories 72 67
Increase In prepaid expenses (7) (21)
Decrease (increase) in other asset 20 (33)
Increase (decrease) in accounts payable 244 (215)
Increase in accrued interest and
other currant liabilities 157 90
-------- ---------
Not cash provided by (used in) operating activities (205) 468
Cash flows from Investing activities:
Proceeds from the sale of fixed assets 324 8
Capital expenditures (153) (173)
-------- --------
Net cash provided by (used in) Investing
activities 171 (165)
Cash flows from financing activities:
Proceeds from borrowing 114 26
Principal payment on debt (269) 157
-------- --------
Not cash used in investing activities (155) (131)
-------- --------
Net Increase (decrease) in cash (189) 172
Cash at beginning of year 200 28
Cash at end of year $ 11 $ 200
========= ========
The accompanying notes are an integral part of these financial statements.
57
<PAGE>
REGAL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(in thousands, except share and per share data)
Supplemental disclosure of cash flow information (in thousands):
Cash paid for interest during the years ended December 31, 1995 and 1994 was
$333 and $352, respectively.
Supplemental schedule of noncash investing and financing activities (in
thousands, except share data):
Holders of Series B Preferred Stock exchanged 130,134 of such shares into
923,952 shares of Common Stock during December 1994.
Long-term debt to related party of $1,002 was converted to Common Stock of $201
and additional paid-in capital of $801 during 1994.
Holders of 2,500,000 shares of Series A Preferred Stock converted their shares
into 7,500,000 shares of Common Stock during 1994.
During 1995, in connection with the Company's restructuring, $99,000 of Notes
Payable were retired of which $30,000 was paid in cash by Harlequin (a
wholly-owned subsidiary of a pension fund of which a Director is Trustee) on
behalf of Regal and $69K of old Notes Payable to Harlequin were converted to new
Notes Payable to Harlequin.
58
<PAGE>
REGAL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER, 31, 1995
(1) CONTINUING OPERATIONS AND BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of Regal
International, Inc. ("Regal") and its wholly owned subsidiaries
(collectively, the "Company") which are Regal Rubber Products, Inc.
("Regal Rubber"), and Bell Petroleum Services, Inc. ("Bell"). All
significant intercompany balances and transactions are eliminated in
consolidation.
The Company is primarily engaged in manufacturing and selling various expendable
rubber products and providing oilfield safety services. The Company's products
are used to support drilling, completion and workover of oil and gas wells as
well as production from completed wells. The Company also produces rubber
products for industrial, construction and other uses.
The Company's consolidated financial statements have been prepared using
accounting principles applicable to a going concern which contemplates the
realization of assets and liquidation of liabilities in the ordinary course of
business. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets or
liabilities that might be necessary should the Company be unable to continue in
existence.
Management of the Company is pursuing several alternatives to return the Company
to consistent profitability. During 1995 the Company successfully secured an
asset-based lending arrangement to allow for more flexible and less costly
working capital financing. In addition, increased sales efforts are being made
to further penetrate international markets. The Company's certification by the
International Standards Organization (ISO 9001) for its quality program will
assist in the marketing of its rubber products internationally. See also Note
(13) Subsequent Events, for further discussion regarding the Company's future
operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents
- ----------------
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Inventories
- -----------
Inventories are valued at the lower of cost or market determined on a first-in,
first-out basis. The company periodically evaluates its inventory to determine
if any unsalable or obsolete inventory exists and adjusts its reserves as
necessary. These evaluations are performed, at a minimum. on an annual basis.
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are carried at cost. Depreciation is computed
using the straight-line method over the estimated useful lives for financial
reporting purposes and by accelerated methods for income tax reporting purposes.
As assets are retired or otherwise disposed of, the cost and related accumulated
depreciation arc removed from the accounts and the resulting gain or loss is
reflected in operations. The cost of maintenance and repairs is charged to
operations as incurred; significant renewals and betterments are capitalized.
Financial Instruments and Concentrations of Credit Risk
- -------------------------------------------------------
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and accounts receivable. The Company
maintains its cash with major domestic banks. The terms of these deposits are on
demand to minimize risk. The Company also has certificates of deposit totaling
$28,000 an $46,000 at December 31, 1995 and 1994, respectively, The Company has
$19,000 and $15,000 classified as restricted cash and $9,000 and $31,000
classified as other assets in 1995 and 1994, respectively. The Certificates of
Deposit mature on various dates through 1998. These certificates of deposit
represent collateral for outstanding letters of credit. The Company has not
incurred losses related to these cash deposits.
Accounts receivable consist of uncollateralized receivables from domestic and
international customers in the oil and gas drilling industry, To minimize risk
associated with international transactions, all sales are in U.S. currency. The
Company routinely assesses the financial strength of its customers. The Company
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends and other information.
The carrying value of the Company's financial instruments approximates their
fair value at December 31, 1995 and 1994.
Estimates
- ---------
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Concentrations
- --------------
Approximately 60% of the Company's labor force is covered by a collective
bargaining agreement which expires in May 1996.
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
Income Taxes
- ------------
Statement of Financial Accounting Standards No. 109 requires the use of an asset
and liability approach for financial accounting and reporting purposes. The
statement also requires deferred tax balances to be adjusted to reflect the tax
rates in effect when those amounts are expected to be payable or refundable.
Deferred income taxes are provided for differences in timing of reporting
certain expenses for financial statement and tax purposes. Deferred tax
liabilities result primarily from the use of accelerated depreciation for tax
reporting and straight-line depreciation for financial statement reporting.
Deferred tax assets relate to (i) expenses recorded for financial statement
purposes that are not currently deductible for tax purposes and (ii) net
operating loss carryforwards and tax credits remaining at December 31, 1995. If
it is likely that some portion or all of a deferred tax asset will not be
realized, a valuation allowance is recognized (See Note 7).
Net Income(Loss) Per Share
- --------------------------
The net income or net loss per share calculation is based on the weighted
average number of shares of Common Stork and Common Stock equivalents
outstanding during the year.
(3) ACCOUNTS RECEIVABLE
On September 23, 1992 the Company entered into a renewable financing agreement
with a third party lender. The agreement provides for advances on selected
accounts receivable of Regal not to exceed an aggregate outstanding balance of
$1,200,000. (Total cumulative advances for the years ended December 31, 1995 and
December 31, 1994 were $2,061,000 and $2,176,000, respectively.) Advances are
limited to 80% of the selected account balances and are recorded as a reduction
of accounts receivable and the related fees are included in interest expense.
The fees charged range from 2.25% to 6.25% of the face value of such invoices
and is calculated based on the period outstanding, The minimum fee is $2,500 per
month. This agreement is collateralized by all Regal and Bell accounts
receivable, inventory, machinery and equipment, and intangibles.
On December 21, 1995, the Company entered into a new two-year asset-based
lending agreement with another third-party lender. On January 16, 1996 a portion
of the proceeds were used to retire the outstanding balance of the above prior
receivable financing agreement. The maximum outstanding balance of $1,500,000 is
also subject to limits of 80% of eligible accounts receivable and 50% of
eligible inventory. It is secured by liens on the Company's accounts receivable,
inventory, equipment and intangibles. The Agreement is subject to certain
positive and negative covenants.
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(4) INVENTORIES
Inventories consist of:
December 31,
------------------
1995 1994
-------- --------
(in thousands)
Raw materials, net of allowance for
obsolescence of $24 and $25,
respectively $ 207 $ 188
Work in process, not of allowance for
obsolescence of $24 and $25,
respectively 525 626
Finished goods, not of allowance
for obsolescence of $306 and
$423, respectively 1,728 1,612
-------- -------
$ 2,460 $ 2,426
======== ========
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
Estimated December 31,
Useful Life 1995 1994
----------------- ------------------
(in thousands)
Land $ 101 $ 216
Building and improvements 5-25 years 1,357 1,520
Manufacturing equipment 4-10 years 7,798 8,074
Other property & equipment 3-5 years 810 865
-------- -------
10,066 10,675
Less: Accumulated depreciation (8,230) (8,446)
-------- -------
$ 1,836 $ 2,229
======== =======
During 1995 Regal disposed of certain manufacturing equipment and related
materials in exchange for $50,000 cash and a merchandise credit of $250,000 to
be used for the purchase of rubber goods from the purchaser of the equipment. In
connection with this transaction Regal has committed to purchase inventory
through October 1998. The Company recognized a gain of $280,000 from this
disposition.
62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(6) LONG-TERM DEBT:
Long-term debt is summarized as follows:
December 31,
-----------------
1995 1994
-------- --------
(in thousands)
Secured Promissory Notes (a) $ 2,058 $ 2,100
Secured Promissory Notes (b) 54 125
Capitalized Leases and Transportation
Equipment Notes (c) 47 89
-------- --------
2,159 2,314
Less current maturities (865) (541)
-------- --------
Total long-term debt $ 1,294 $ 1,773
======== ========
Annual maturities of long-term debt are $865,000, $548,000. $694,000 and $52,000
for the years ended December 31, 1996, 1997, 1998, and 1999, respectively.
(a) The Company restructured a total of $2,081,000 of its debt in 1994. In the
restructuring, new notes were issued for the full principal amount of the old
notes. Noteholders were given the option of restructuring the note over 48
months or the purchase of the note by the Company's majority shareholder. The
restructuring incorporated both secured promissory notes and unsecured
promissory notes. The new notes called for a principal reduction of 5%, paid in
January 1995, interest only for six months and 42 equal monthly installments of
the remaining principal and interest until maturity. Notes of approximately
$19,000 were paid in full as part of the restructuring. Notes payable to related
parties of $1,396,000 and $1,284,000 are included in the December 31, 1995 and
1994 balances outstanding, respectively. Several of the noteholders did not
accept the restructuring. See (b) below.
(b) These notes are in default at December 31, 1995. The holders of the notes
were given the opportunity to restructure their notes or to accept Harlequin's
offer to buy their notes in December 1994 but did not accept either offer.
(c) These notes are payable in monthly installments through various dates in
1997 and bear interest at varying rates.
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(7) INCOME TAXES:
The Company files a consolidated federal income tax return. At December 31, 1995
the Company had available unused operating loss carryforwards and tax credit
carryforwards that expire as follows:
<TABLE>
<CAPTION>
Net operating Percentage
Expiring Loss Depletion Contribution combined
December 31, Carryforwards Carryforwards Carryforwards Carryforwards
- -------------- ----------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
1906 $ $ $ 2,000 $ 2,000
1997 12,000 12,000
1998 802,000 11,000 813,000
1999 3,671,000 8,000 3,679,000
2000 2,609,000 6,000 2,615,000
2001 6,392,000 4,000 6,396,000
2003 4,039,000 4,039,000
2004 2,423,000 2,423,000
2005 2,050,000 2,050,000
2006 3,430,000 3,430,000
2007 562,000 562,000
2009 413,000 413,000
--------------- ----------------- -------------- --------------
TOTALS 26,391,000 $ 41,000 $ 2,000 26,434,000
=============== ================= ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Research and
Development Employee Stock Investment Combined
Expiring Tax credit Ownership Plan Tax Credit Tax Credit
December 31, Carryforwards Tax Credit Carryforwards Carryforwards
- ------------- ------------- --------------- ------------- -------------
<C> <C> <C> <C> <C>
1996 $ 3,000 $ $ 179,000 $ 182,000
1997 5,000 28,000 76,000 109,000
1998 8,000 13,000 99,000 120,000
1999 4,000 16,000 74,000 94,000
2000 16,000 16,000
2001 10,000 10,000
------------- --------------- ------------ --------------
TOTALS $ 20,000 $ 83,000 $ 428,000 $ 531,000
============= =============== ============ ===============
</TABLE>
The utilization of these credits and carryforwards is subject to certain
limitations imposed by the 1986 Tax Reform Act and is significantly restricted
by Section 382 of the Internal Revenue Code due to ownership changes. The above
amounts may be subject to separate return limitation rules.
64
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
Deferred tax assets and liabilities total $9,259,000 and $375,000, respectively,
at December 31, 1995 and $9,668,000 and $257,000, respectively, at December 31,
1994.
The current and noncurrent deferred tax assets and liabilities are comprised of
the following:
Current Non-Current
------- -----------
Deferred tax liability:
Depreciation $ (375,000)
Deferred tax assets:
Loss Carryforwards 8,973,000
Other Tax Credits 195,000
Accruals $ 73,000
Allowance for Doubtful Accounts 18,000 -
--------- ------------
91,000 8,793,000
Less Valuation Allowance (91,000) (8,793,000)
--------- ------------
Net Deferred Tax Assets -0- -0-
========= ============
The valuation allowance decreased by approximately $528,000 from January 1, 1995
to December 31, 1995 primarily as a result of the expiration of net operating
loss carryforwards.
The following reconciles the expected tax provision by applying statutory rates
to 1995 pre-tax income:
Expected tax provision $ 9,923
Excess book depreciation 35,487
Additional bad debt expense (7,364)
Additional warranty expense (1,650)
Gain on Sale of Assets 12,754
Nondeductible Interest Expense 64,667
Nondeductible Vacation Expense 6,326
Other Nondeductible Expenses 2,509
Tax Benefit of NOL Carryforwards (122,652)
----------
$ -0-
==========
65
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(8) STOCKHOLDERS' EQUITY
As part of the 1994 restructuring described in Note (6), the holders of Series A
Preferred Stock and 50,000 shares of Series B Preferred Stock voted to convert
their shares. The terms of both Preferred Stock Series A and B state that if a
majority of shareholders vote as a single class to convert their shares, then
all shares shall be deemed converted. As a result, all of the Preferred Stock
was converted to Common Stock. Additionally, the accumulated Preferred Stock
dividends and liquidation preference were eliminated. The effects of the
restructuring are reflected in the accompanying financial statements as of
December 31, 1994.
The following tables summarize the activity of warrants and options:
During 1987 and 1988, the Company issued five-year Common Stock options in
conjunction with its financing activities to various promissory note holders and
other selected creditors. During 1989, the Company issued five and ten-year
stock options in an additional financing and extension of debt.
COMMON STOCK OPTIONS
1995 1994
---- ----
Shares under option beginning of year 150,000 328,000
Expired - (178,000)
--------- ---------
Shares under option end of year 150,000 150,000
========= =========
Average exercise price of outstanding
options $.156 $.156
Exercisable at end of year 150,000 150,000
========= =========
In December 1991 the Board of Directors approved the issuance of Common Stock
options to members of the Board of Directors. The options were to expire in five
years and be issued at 110% of market value on the date of grant.
COMMON STOCK OPTIONS
1995 1994
---- ----
Options at beginning of year 1,000,000 1,000,000
Issued 300,000 -
Restated - 50,000
Expired (300,000) (50,000)
---------- ----------
Shares under option end of year 1,000,000 1,000,000
========== ==========
Average exercise price of
outstanding options $ .14 $ .14
---------- ----------
Exercisable at end of year 1,000,000 1,000,000
========== ==========
66
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
The Company has never paid a cash dividend. It is the current policy of the
Board to retain earnings, if any, to provide funds for the Company's operations.
The payment of dividends is at the discretion of the Board, and dividends may be
paid only out of current earnings and profits or retained earnings. The Company
had an accumulated deficit of $18,487,000. No funds have been legally available
for the payment of dividends since 1983.
(9) EXPORT SALES:
The Company is represented worldwide in all oil and gas producing areas. Export
sales totaled $2,074,000 in 1995 and $1,500,000 in 1994.
(10) COMMITMENTS AND CONTINGENCIES:
Leases
- ------
The Company has operating leases covering equipment and various warehouse and
office locations. No contingent rentals are involved and management expects that
most of these will be renewed or replaced by other leases in the normal course
of business.
Future minimum payments under operating leases at December 31, 1995 are
approximately $72,000 in 1996, $74,000 in 1997, $59,000 in 1998 and $23,000 in
1999. Total rent expense under operating leases was $69,000, and $67,000 in 1995
and 1994, respectively.
Legal Proceedings
- -----------------
The Company is involved in lawsuits arising in the ordinary course of business.
Management is unable to predict the ultimate outcome of these suits, but intends
to contest them vigorously and believes that the disposition of all the suits
individually and in the aggregate, after taking into account the available
insurance coverages, should not have a material adverse affect on the Company's
operations or financial condition.
Insurance
- ---------
The Company maintains public liability, product liability, property damage,
workers' compensation insurance. The public and product liability policies cover
losses which occur during the respective policy periods.
Insurance companies provide coverage over specified individual and group
retention levels for employee health insurance costs. The Company self insures
claims under those retention levels. The self funded claims arc accrued based on
actuarial estimates of the Company's exposure for the plan year. These claims
are paid as incurred.
67
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
Letters of Credit
- -----------------
Regal has restricted cash in interest bearing Certificates of Deposit which are
pledged against outstanding letters of Credit that mature at various dates
through 1998. At December 31, 1995, Regal had $28,000 in restricted cash of
which $9,000 was included in Other Assets and $19,000 was classified as
Restricted Cash. At December 31, 1994, Regal had $46,000 in restricted cash of
which $31,000 was included in Other Assets and $15,000 was classified as
Restricted Cash. These Letters of Credit are required as performance guarantees
by certain foreign customers.
(11) EMPLOYEE BENEFIT PLAN:
In October 1991, the Company adopted an Internal Revenue Code (Section 401K)
Plan for all of its eligible employees. The plan has a 6 year vesting schedule
and allows a discretionary employer match of contributions made by employees.
(12) RELATED PARTY TRANSACTIONS:
As a part of the Company's restructuring, Harlequin converted $1,002,604 of debt
into 20,052,082 shares of Common Stock in 1994. In addition, notes totaling
$1,366,000 were purchased by Harlequin pursuant to an offer to the noteholders
to buy their notes.
During 1995, Harlequin advanced $100,000 to the Company. Notes to Harlequin
accrue interest at rates ranging from 9% to 10%. Interest expense for the year
was $131,000, Accrued interest at December 31, 1995 was $190,000 and is included
in Other Accrued Expenses.
During 1995, directors fees of $9,500, $6,000 and $11,000 were paid to
Messrs. Sharma, Furner and Ollquist. respectively and $60,000 payable to
Mr. Richard Gray was accrued.
During 1994, Directors' Fees of $30,000, $30,000, $12,000 and $6,500 were paid
to Messrs. Plunkett, Beinhocker, Ollquist and Sharma, respectively and $60,000
payable to Mr. Richard Gray was accrued.
Amounts due Richard Gray, or companies affiliated with Mr. Gray, at December 31,
1995 and 1994 were $92,000 and $34,000, respectively, and are included in Other
Accrued Expenses.
During 1994, the following interest payments were made to related parties:
Whistling, Ltd; (a company wholly owned by the children of a Regal Director),
$18,000, Bermuda Holding Company (a company wholly owned by the wife of a Regal
Director), $29,000; The Plunkett Family (relatives of a Director), $28,000; and
Gary Sherman Investments, Inc. ("GSI") (a company wholly owned by a Director),
$25,000. Interest expense payable to Harlequin was $75,000 of which $25,000 was
paid and $50,000 was classified as Other Accrued Expenses at December 31, 1994.
68
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1995
(13) SUBSEQUENT EVENTS:
On January 31, 1996 Regal acquired all the issued and outstanding shares of
Acewin Profits Limited, a British Virgin Islands corporation ("Acewin"), from
China Strategic Holdings Limited, a Hong Kong company ("CSH"). Acewin's sole
asset is a 55% joint venture interest in Wuxi CSI Vibration Isolator Co., Ltd.
("Wuxi"), a Sino-foreign joint venture. Regal paid $13.5 million for the shares
of Acewin common stock. Such purchase price was paid by delivery of a $13.5
million Convertible Note bearing interest at the rate of nine percent (9%) per
annum (the "Convertible Note"').
The Convertible Note is payable interest only on an annual basis, with all
principal being due and payable on January 31, 1999, The principal and any
unpaid interest owing on the Convertible Note are convertible into shares of
Regal Common Stock at a conversion price of $0.0302 per share. The principal
amount of the Convertible Note will be reduced if the audited financial
statements of Wuxi for the year ended December 31, 1995 reflect all after tax
profit of less than $3.0 million. The adjustment is a formula designed to assure
the purchase price paid by the Regal for the Wuxi interest does not exceed eight
(8) times Wuxi's 1995 after-tax earnings. Assuming no adjustment, the
Convertible Note is convertible into 84.5% of Regal's current outstanding shares
of Common Stock. The Convertible Note is secured by a Pledge Agreement granting
CSH a security interest in the shares of Acewin capital stock.
Immediately following the acquisition of the shares of Acewin capital stock and
as a condition thereto, Regal sold and transferred all the existing operating
assets and real property of Regal to a newly formed corporation, Regal (New)
International, Inc. ("New Regal") in exchange for $2.5 million and New Regal's
assumption of all outstanding liabilities of Regal, other than tile Convertible
Note, New Regal is a wholly-owned subsidiary of Harlequin Investment Holdings
Limited ("Harlequin"). The $2.5 million portion of the purchase price was paid
as follows: $800,000 in cash and the balance by delivery to Regal of two
promissory notes, one in the principal amount of $900,000 (tile "$900,000 Note")
and the second in the principal amount of $800,000 (tile "$800,000 Note"). The
$900,000 Note bears interest at 9% per annum and is payable in sixty (60) equal
monthly installments of principal and interest. The $800,000 Note bears no
interest and is due and payable in one installment on January 31, 2001. New
Regal's obligations under the $900,000 Note and the $800,000 Note are secured by
a pledge of all of the issued and outstanding shares of capital stock of New
Regal.
In connection with the above-described transactions, Janak Desai, Nils Ollquist
and Girish Sharma resigned as Directors of Regal, and Oei Hong Leong, the
Chairman of CSH, Chung Cho Yee Mico, and Ma Wai Man were elected to fill the
vacancies created by such resignations. See Note (1) Continuing Operations and
Basis of Presentation.
69
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
- --------------------------------------------------------
The Board of Directors of the Registrant has elected to change its
independent accountants from Pannell Kerr Forster of Texas P.C. ("Pannell Kerr")
to Arthur Anderson & Co. The decision resulted from the fact that after February
19, 1996 the Registrant's sole operating subsidiary is located in China, where
Arthur Anderson has greater resources in the Registrant's areas of operation,
and a prior, ongoing business relationship with the Registrant.
Although Pannell Kerr's report on the Registrant's audited financial statements
for the fiscal year ended December 31, 1994 and 1995 contained a "going concern"
qualification, the change in independent accountants is not related to such
qualification or to any disagreement with Pannell Kerr.
70
<PAGE>
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
- --------------------------------------------------------------------------
Listed below are the names, ages and positions as of March 31, 1997 of the
executive officers and directors of the Company. The Company's executive
officers are appointed by the Board of Directors to serve in their respective
capacities until their successors are duly appointed by the Directors and
qualified to serve. The Certificate of Incorporation of the Company provides for
classification of the Board of Directors into three classes (Class I, Class II
and Class III) having staggered terms of three years each. The Board of
Directors of the Company shall consist of not less than five nor more than
twelve members as determined by resolution of the Board or by the stockholders
at any annual meeting. At present, the Company's Board of Directors consists of
six directors who serve during the term of their class, or until their class is
assigned, and until their successor is appointed :
Name Age Position & Office
- ---------------------- --- ---------------------------
Oei Hong Leong 49 Director, Chairman
Chung Cho Yee, Mico 36 Director, President
Ma Wai Man, Catherine 31 Director, Secretary
Richard N Gray 50 Director
Martin Furner 43 Director
Pang, Jim 36 Chief Financial Officer
Mr. Oei was elected a director on February 19, 1996 and serves as Chairman of
the Board of Directors. Mr. Oei Hong Leong is a prominent businessman in China,
Hong Kong, Singapore and Indonesia. He was educated in Beijing and has gained
extensive knowledge and experience of business operations in China. He has been
the Chairman and Chief Executive Officer of publicly traded companies in Hong
Kong, Indonesia, Malaysia and Singapore. He is currently Chairman and Chief
Executive Officer of China Strategic Holdings Limited ("CSH"), a substantial
shareholder of the Company and the Chairman of China Tire Holdings Limited
("CTHL"), MRI Holdings Limited ("MRI") and Bolton Group (International) Limited
("Bolton"), both are listed on the Stock Exchange of Hong Kong (the "SEHK"), the
New York Stock Exchange, the Australia Stock Exchange and the London Stock
Exchange respectively. Mr. Oei is also a director of Sum Cheong International
Limited ("Sum Cheong") and Tricom Holdings Limited ("Tricom"), both are
companies listed on the SEHK.
Mr. Chung Cho Yee, Mico, was elected a director on February 19, 1996.
Mr. Chung is a solicitor by profession and has extensive experience in
the finance industry. Mr. Chung is a director of CSH, Sum Cheong, Tricom,
Star Telecom International Holding Limited ("Star"), all listed on the SEHK.
He is also a director and a Senior Vice President of CTHL, and a director of
MRI and Bolton.
71
<PAGE>
Ms. Ma Wai Man, Catherine, was elected a director on February 19, 1996.
Ms. Ma is a chartered secretary and has over 9 years of working
experience in the company secretarial profession. Ms. Ma is a director
of CSH, Allan International Holdings Limited, Star and South Sea Development
Company Limited and an alternate director of Tricom, all of which are
companies listed on the SEHK. She is also a director of MRI and the
Secretary of CTHL and Bolton.
Mr. Richard Gray, Director, is a practicing Chartered Accountant and Business
Consultant with offices in Guernsey and London as well as associated offices
around the world. For the last ten years, Mr. Gray has concentrated on
establishing new business's, particularly international trading companies. He is
an officer of a number of investment companies, including Guernsey Holdings
Limited. Prior to his association with Guernsey Holdings Limited, Mr. Gray was
Group Finance Director of the Noble Denton Group where he played a key role in
its development internationally. Noble Denton is one of the leading Marine
Consultants in the world. Mr. Gray is a Fellow of the Institute of Chartered
Accounts in England and Wales, a Fellow of the British Institute of Directors
and a graduate of the Advanced Management Program of the Harvard Business
School.
Mr. Martin Furner, Director, is the Chairman of the Board of Tapestry Holidays,
a specialist tour operator in the UK. Prior to joining Touche Ross Management
Consultants in 1986, he held several positions including legal and fiscal
coordinator (Europe and Africa) for Flopetrol, Inc., a division of the
Schlumberger Group. In 1989, Mr. Furner joined a newly restructured group, Noble
Raredon, PLC. He initially worked in the London head office before moving to
Bremen, Germany as Finance Director of the European Tour Operations Division.
Mr. Furner holds a BA in physics from the prestigious Oxford University, is a
member of the Association of Certified Management Accountants and the Institute
of Travel and Tourism, and holds a Wine & Spirits Education Trust Higher
Certificate.
Mr. Jim Pang, the Chief Financial Officer of the Company, is a Chartered
Accountant. He practiced public accountancy prior to joining China
Strategic Holdings Limited. In addition, Mr. Pang has significant
experience in banking operations and international project consultancy. He
received his MBA degree in Canada and is currently a member of the Institute
of Chartered Accountants of Ontario and the Canadian Institute of Chartered
Accountants.
72
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION
- --------------------------------
No executive received compensation during 1996.
Stock Options
- --------------
No stock options or stock appreciation rights were granted to any directors or
officers of the Company during 1996.
Directors Fees
- ---------------
Directors are reimbursed for travel and other expenses relating to Board
and committee meetings. Mr. Gray and Mr. Furner received $10,000 each in
fiscal 1996 for serving as directors of the Company.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The following table shows, as of March 31, 1997, all shares of Common Stock,
held beneficially, directly or indirectly, by (i) each Director, (ii) each owner
who is known by the Company to own beneficially more than 5% of either class of
stock and (iii) all directors and officers as a group.
Number of Shares of
Common Stock Percentage
Name Beneficially Owned of Class
- --------------------------------------------------------------------------
China Strategic Holdings Ltd.(1)
52nd Floor, Bank of China Tower
1 Garden Road, Hong Kong 1,033,877,483 96.16%
Harlequin Investment Holdings
Ltd.(2)(3)
Creque Building, Tortola,
British Virgin Islands 4,452,082 0.41%
Richard N Gray(2)(3)
Director
Noble House, Queens Road
St. Peter Fort, Guernsey
Channel Islands 4,452,082 0.41%
Oei Hong Leong(1)
Director
52nd Floor, Bank of China Tower
1 Garden Road, Hong Kong 1,033,877,483 96.16%
Chung Cho Yee, Mico(1)
Director
52nd Floor, Bank of China Tower
1 Garden Road, Hong Kong 0 0%
Ma Wai Man, Catherine(1)
Director
52nd Floor, Bank of China Tower
1 Garden Road, Hong Kong 0 0%
Pang, Jim(1)
Chief Financial Officer
73
<PAGE>
52nd Floor, Bank of China Tower
1 Garden Road, Hong Kong 0 0%
Martin J Furner
Director
24 Chiswick High Road, Chiswick
London W4 1TE 0 0%
All Directors and Officers as
a Group (6 persons) 1,038,329,565 96.57%
As used in this table, "beneficial ownership" means the sole or shared power to
vote, or to direct the voting of, a security, or the sole or shared investment
power with respect to a security (i.e., the power to dispose of, or to direct
the disposition of a security).
(1) China Strategic Holdings Limited has direct voting and investment power with
respect to 40,500,000 shares and indirect voting and investment power with
respect to 993,377,483 shares issuable upon the conversion of a $30,000,000
Convertible Note held by Horler Holdings Limited, P.O. Box 71, Craigmuer
Chamber, Road Town, Tortola, British Virgin Islands, a wholly owned subsidiary
of China Strategic Holdings Limited. Mr. Oei Hong Leong is a majority
shareholder of China Strategic Holdings Limited.
(2) Harlequin Investment Holdings Limited has sole voting and investment power
with respect to the shares of common stock. The beneficial ownership set forth
herein does not include 8,000,000 shares of common stock which can be acquired
upon an exercise of a Stock Purchase Option granted by China Strategic Holdings
Limited to Harlequin Investment Holdings Limited. The percentage of beneficial
ownership is based upon 81,806,198 shares of common stock outstanding as of
March 31, 1997.
(3) Harlequin Investment Holdings Limited is a wholly owned subsidiary of GHL
(Senior) Pension Fund, Noble House, Queens Road, St. Peter Port, Guernsey,
Channel Islands. Richard N Gray and Overseas Trust Company Limited as trustees
of GHL (Senior) Pension Fund and have the same address. Mr. Gray and Overseas
Trust Company Limited each disclaim beneficial ownership of the shares of common
stock.
As of March 31, 1997, there were approximately 9,000 shareholders of record. The
percentage of beneficial ownership is based upon 81,806,198 shares of common
stock outstanding as of March 31, 1997 and 993,377,483 shares of common stock
issuable upon conversion of the remaining portion of the Convertible Note.
74
<PAGE>
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Acquisition of Wuxi, CSI
- ------------------------
On February 19, 1996, Regal International, Inc. (the "Registrant") acquired all
the issued and outstanding shares of Acewin Profits Limited, a British Virgin
Islands corporation ("Acewin"), from China Strategic Holdings Limited, a Hong
Kong Company ("CSH"). Acewin's sole asset is a 55% joint venture interest in
Wuxi CSI Vibration Isolator Co., Ltd. ("Wuxi CSI"), a Sino-foreign joint
venture. Registrant paid $13.5 million for the shares of Acewin capital stock.
Such purchase price was paid by delivery of a $13.5 million Convertible Note
bearing interest at the rate of nine percent (9%) per annum (the "Convertible
Note").
The Convertible Note is payable interest only on an annual basis, with all
principal being due and payable on January 31, 1999. The principal and any
unpaid interest owing on the convertible Note are convertible into shares of
Regal Common Stock at a conversion price of $0.0302 per share. The purchase
price was approved by the Board of Directors of the Registrant based upon Wuxi
CSI having an after-tax profit of not less than $3.0 million so that the
purchase price paid by the Company for the Wuxi CSI interest would not exceed
eight (8) times Wuxi CSI's 1995 after-tax earnings. The Convertible Note is
secured by a Pledge Agreement granting CSH a security interest in the shares of
Acewin capital stock. In connection with above-described transactions, Janak
Desai, Nils Ollquist and Garish Sharma resigned as directors of Regal, and Oei
Hong Leong, the Chairman of CSH, Chung Cho Yee, Mico and Ma Wai Man, Catherine
were elected to fill the vacancies created by such resignations. As a result of
this transaction, CSH became a principal stockholder of the Company. Oei Hong
Leong, Chairman of the Board, Chung Cho Yee, Mico and Ma Wai Man, Catherine, are
also directors and officers of CSH.
Sale of Assets
- --------------
Immediately following the acquisition of the shares of Acewin capital stock and
as a condition thereto, the Registrant sold and transferred all its existing
operating assets and real property of the Registrant to a newly formed
corporation, Regal (NEW) International, Inc. ("New Regal") in exchange for $2.5
million and New Regal's assumption of all outstanding liabilities of the
Registrant, other than the Convertible Note. The $2.5 million portion of the
purchase price was paid as follows: $800,000 in cash and the balance by delivery
to the Registrant of two (2) promissory notes, one in the principal amount of
$900,000 (the "$900,000 Note") and the second in the principal amount of
$800,000 (the "$800,000 Note"). The $900,000 Note bears interest at 9% per annum
and is payable in sixty (60) equal monthly installments of principal and
interest. The $800,000 Note bears no interest and is due and payable in one
installment on January 31, 2001. New Regal's obligations under the $900,000 Note
and the $800,000 Note are secured by a pledge to the Registrant of all the
issued and outstanding shares of capital stock of New Regal.
75
<PAGE>
Harlequin Investment Holdings, Inc., a principal stockholder of the Company
("Harlequin"), owns all the outstanding capital stock of New Regal. Harlequin is
a wholly owned subsidiary of GHL (Senior) Pension Fund. Mr. Gray, the Chairman
of the Board of the Company, is a trustee of GHL (Senior) Pension Fund.
Sale of Harlequin Stock
- -----------------------
In April 1996, Horler Holdings Limited, a wholly owned subsidiary of CSH,
acquired 40,500,000 shares of outstanding Common Stock of the Company from
Harlequin in exchange for $1,223,000. The purchase price was paid as follows :
(i) $209,328 in cash, (ii) $211,672 by cancellation of a certain promissory
note, dated August 8, 1994, from Harlequin to CSH and (iii) $800,000 by
cancellation of another promissory note from Harlequin to CSH.
Acquisition of Hangzhou Huantong
- --------------------------------
On September 10, 1996, the Registrant has consummated a transaction whereby the
Registrant acquired all the issued and outstanding shares of Westronix Limited,
a British Virgin Islands corporation ("Westronix"), from CSH pursuant to the
terms of the Acquisition Agreement entered into on September 10, 1996.
Westronix's sole asset is a 100% equity interest in China Construction Holdings
Limited, a Hong Kong Limited ("China Construction") which owns 51% joint venture
interest in Hangzhou Zhongche Huantong Development Co., Ltd. ("Hangzhou
Huantong"), a Sino-foreign joint venture established in Hangzhou, Zhejiang
Province, China on June 23, 1993. The consideration paid by the registrant is a
$30 million Convertible Note bearing interest at the rate of nine percent (9%)
per annum after an initial six (6) month interest-free period (the "Note").
The Note is payable interest only on an annual basis, with all principal being
due and payable on September 10, 1999. The principal and any unpaid interest due
on the Note are convertible into shares of Common Stock, $0.01 par value, of the
registrant ("Common stock") at a conversion price of $0.0302 per share. The Note
is secured by all assets of Westronix and its related subsidiaries.
Hangzhou Huantong is a joint venture between China Construction (51%) and
Hangzhou Transportation Development Corporation (49%). CSH from whom the
Registrant acquired Hangzhou Huantong, is an affiliate of the Registrant and the
major shareholder of the Registrant's common stock. Three directors of the
Registrant are also the directors of CSH.
The Company shares the office space and administrative support, with CSH, a
major shareholder of the Company. In fiscal 1996, the Company was charged RMB
1.29 million by CSH as a management fee for the use of the office space and
staff support.
76
<PAGE>
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) EXHIBITS
Exhibit 16 - Letter from Pannell Kerr Forster P.C.
Exhibit 21 - Subsidiaries of the Registrant
(b) REPORTS ON FORM 8-K
Registrant did not file a Form 8-K i.e.: Change in Accountants.
77
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
REGAL INTERNATIONAL, INC.
By: /s/Oei Hong Leong
---------------------------------
Oei Hong Leong
Chairman of the Board of Directors
Date: 2/22/98
Pursuant to the Securities Exchange Act of 1934, this report has been signed by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
By: /s/Chung Cho Yee, Mico Date: 2/22/98
------------------------------- -------------------
Chung Cho Yee, Mico
Director
By: /s/ Ma Wai Man, Catherine Date: 2/22/98
------------------------------- -------------------
Ma Wai Man, Catherine
Director
By: /s/ Richard N. Gray Date: 2/22/98
------------------------------- -------------------
Richard N Gray
Director
By: /s/ Martin Furner Date: 2/22/98
------------------------------- --------------------
Martin Furner
Director
78
<PAGE>
EXHIBIT 16
February 23, 1998
Securities and Exchange Commission
Washington, D.C. 20549
Gentlemen:
We have read Item 8 of the Report on Form 10KSB of Regal International Inc.
(Commission File Number 1-8334) and we agree with the statements contained
therein as they relate to our firm.
Yours very truly,
/s/ Pannell Kerr Forster
Pannell Kerr Forster of Texas, P.C.
79
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Prior to September 10, 1996
Acewin Profits Limited, a British Virgin Islands corporation
China Machine Holdings Limited, a Hong Kong corporation
Wuxi CSI Vibration Isolator Co., Ltd. (55%), a Sino-foreign joint venture
After September 10, 1996
Westronix Limited, a British Virgin Islands corporation
China Construction Holdings Limited, a Hong Kong corporation
Hangzhou Zhongche Huatong Development Co., Ltd. (51%), a Sino-foreign joint
venture
80
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